Only half of UK Baby Boomers – the generation born between 1946 and the early 1960s – are financially equipped for retirement, according to new analysis.
The remainder are expected to fall short of the pension savings they need to sustain their current lifestyle in retirement or achieve a moderate standard of living.
Georgina Yarwood, senior investment strategy analyst at Vanguard Europe said: “It is concerning that half UK Baby Boomers aren’t on track to meet their retirement goals, given the demographic’s proximity to retirement.”
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Defined benefit pensions versus defined contribution pensions
The significance of defined benefit pension schemes versus defined contribution pensions to Boomers’ retirement readiness is also revealed in the report by investment manager Vanguard.
Those with access to defined benefit (DB) pension schemes are twice as likely to reach their retirement savings goals as those without.
More than two thirds (69%) of soon-to-be retirees with a DB pension are on track for retirement. This is compared to just 28% without, who are more likely to be relying on stock market invested defined contribution (DC) pensions and the state pension.
Office for National Statistics figures show 65% of those in their 60s have pension wealth in DB schemes compared to 25% having wealth in DC schemes – which were far less widespread prior to 2012 when auto-enrolment began.
Significantly, for those expecting to receive DB income, the Vanguard report finds this will make up approximately half of their projected retirement income.
Middle-income Baby Boomers at greatest risk
There are two main types of spending goals in the pension industry: relative and absolute.
A relative spending goal is tied to an individual’s pre-retirement income. An absolute spending goal is based on achieving a specific living standard in retirement, measured in pounds.
The relative spending goal in the Vanguard report is target replacement rates by gross earnings bands – what percentage of your pre-retirement earnings you should be aiming for to sustain you in retirement.
Gross earnings band | Target replacement rate |
|---|---|
Less than £17,700 | 86% |
£17,700 to £32,599 | 76% |
£32,600 to £46,599 | 72% |
£46,600 to £74,599 | 62% |
Over £74,600 | 50% |
The absolute measure is the Pensions and Lifetime Savings Association’s (PLSA) Retirement Income Standards.
We look at the PLSA standards in a separate article on how much you need to retire comfortably.
Most high-income Baby Boomers have sufficient savings for a comfortable retirement, regardless of the spending measure, according to the Vanguard report.
Middle-income Baby boomers are at the greatest risk, with most not projected to meet their spending goal under either measure.
Most low-income workers can meet their relative spending goal due to reliance on the state pension, but many fall short of even the minimum absolute retirement living standard.
Yarwood said: “Planning for retirement can feel complex and overwhelming. However, there are things people in, at or entering retirement can do that will make a difference to their financial situation.”
Steps to boost your retirement savings
There are ways to boost your pension savings if you are worried about falling short.
1. Delay retirement or take a phased approach
For those that are able, deferring retirement or taking a phased approach, by continuing to work part-time for a few years, can enhance financial security and improve retirement readiness.
2. Leverage home equity
Aside from pension wealth, property is the largest source of wealth for most individuals. For retirees with a spending shortfall, one potential solution is to access home equity. This can be achieved through downsizing, relocating to a lower-cost area or through equity release.
Accessing the money tied up in property can unlock additional funds, significantly reducing or even eliminating the retirement spending gap. With rising property values in recent decades, this strategy has become increasingly relevant for retirees.
3. Reset spending goals
Retirement readiness depends greatly on the spending goal in mind. There is evidence many people spend less than they would anticipate during retirement.
Reducing the annual spending goal by 10%, if possible, would significantly improve retirement readiness. Though careful thought needs to be given to an individual’s own unique needs and circumstances.
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