'Living Pension' proposed to help savers accrue sufficient retirement savings

A report from the Resolution Foundation has proposed the creation of a ‘Living Pension’ to help savers understand the contributions required to provide an adequate income in retirement.

The report, titled Building a Living Pension, was authored with Aviva and sets out a framework through which a ‘Living Pension’ could be calculated, identifying the contributions required by workers and their employers today to save for an adequate income in retirement.

The Resolution Foundation commented that this framework was more complex than that required for developing the Living Wage due to a number of factors, including the fact that a retirement income may support an entire family, meaning that income requirements in retirement should be the weighted average of the different living requirements of the entire pensioner population.

The report examined the calculation of adequate income in retirement, noting that numerous factors, such as geographic variation, housing costs and family circumstances would create different necessary incomes for different retirees.

For example, a single homeowner pensioner would require a weekly income of just over £200, while the average couple who were privately renting would require almost £450 per week.

The average pension pot required across all cohorts in order to provide a Living Pension was determined to be around £70,000 over all current low to middle income employees, though the report noted that this required making projections that spanned 80 years or more.

In order to meet its definition of a Living Pension, the report estimated that someone in their 20s on average earnings of £25,000 per year would need to increase their pension savings from the current automatic enrolment rate of 8 per cent of a specified earnings band to a little over 11 per cent of all earnings.

This would rise to 15 per cent, or an additional £1,300, for the 35 year old age cohort, and on average savers would need to save an additional £1,500 a year above the current minimum auto-enrolment requirements.

The report stated that this development of a framework was a necessary first step in understanding the feasibility of a ‘Living Pension’ standard, which will need to be further refined, before a governance and accreditation process can be explored by the Living Wage Foundation.

The report commented: “If a new Living Pension accreditation standard is created, it will be an exciting step forward for pension saving. It will be clear and simple – calculated by organisations independent from the pensions industry that have extensive experience in encouraging and recognising the actions of responsible employers.

“Not only will a Living Pension standard improve confidence in workplace pensions, but it could also significantly improve pension outcomes – particularly for people on low-to-middle incomes.”

Commenting on the proposal, Pensions and Lifetime Savings director of policy and advocacy, Nigel Peaple, said: “We are very pleased to see other voices, the Resolution Foundation and Aviva, joining us to highlight that people are not saving enough for retirement. We hope the government and savers take note to help ensure everyone achieves an adequate income in retirement.”

He added that the primary differences between the proposal and the PLSA’s own Retirement Living Standards were that the former “includes the cost of paying rent in retirement” and that it “focuses on one level, a minimum, whereas the Retirement Living Standards also provide two higher levels of lifestyle”.

Peaple added: “Later this year, the PLSA will be updating the three levels of the Retirement Living Standards – minimum (£10,000), moderate (£20,000), and comfortable (£30,000). This will provide some very interesting post pandemic findings.

“Currently, over 40 pension providers, including Legal & General and The People’s Pension; and workplace pension schemes operated for employees at companies like M&S and Tesco, are using the Retirement Living Standards. We estimate they are reaching over 14 million savers.

“We welcome the proposal that the Living Wage Foundation will consider how to encourage employers to provide higher levels of savings.”

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