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How much money is enough for a good later life?

The stated aim of the new state pension is to provide a basic level of income, which people are expected to top up with private pension income. When asking what makes for an adequate income in later life, the best test of the role of the state pension is how well it serves those who are reliant on it as their main or only source of income in later life.

Claire Turner, Director of Evidence at Ageing Better, looks at how much money is needed for an adequate income in later life and what the role of the state pension is.

We still need to do more to raise awareness of the amount income people will receive from the state pension and the fact that many people will need to save on top of the state pension to achieve adequate retirement incomes.

The Government’s stated aim of the new state pension is to provide a basic level of income that people are expected to top up with private pension income. Last week, at the launch of a new Pensions Policy Institute (PPI) report on State Pension indexation – co-sponsored by Ageing Better, Age UK and the TUC – we debated the role of state pension and what makes for an adequate income in later life.

I would argue that the best test of the role of the state pension is how well it serves those who are reliant on it as their main or only source of income in later life. Particularly those with a lifetime of low income; those who would find it difficult to work for longer (due to ill health); do not have assets (such as owning their own home) to draw on; or who have extra costs (such people with disabilities).

On this basis, shouldn’t the role of the state pension be to prevent people from falling into poverty?

Overall, pensioner poverty is a good news story. Pensioners were the most likely to be the group experiencing poverty, now they are the least likely. Yet a substantial number of pensioners still have a low standard of living, especially if they are disabled or in ill health. Indeed, pensioner poverty has risen from 13% in 2011/12 to 16% in 2015/16. We don’t want to take a further backwards step.

Providing an adequate level of income for later life

From the indexation options explored within the report – triple lock, double lock and an earnings link – keeping the triple lock provides the most adequate basic level of income and gives those who can afford to a better foundation on which to build their retirement income than the double lock or an earnings link indexation. This holds true for pensioners now and in the future, indeed future generations would gain more under the triple lock.   

On adequacy of income in later life, the report acts as an important reminder of the value of the state pension and what the average person might need to save to have a ‘good enough’ standard of living. The full new state pension is £159.55 per week (2017/18), which is £8,300 per year. This is 24% of national average earnings.  

Adequacy will mean different things to different people but there are some potential targets cited in the report. The Joseph Rowntree Foundation (JRF) identifies a Minimum Income Standard based on what the public think people need for an acceptable minimum standard of living. For a single pensioner, this is £10,000 per year (based on 2017 calculations). This would mean making up a shortfall of £1,700 per year with private pension savings.  

The Pensions and Lifetime Savings Association (PLSA) are about to start work to define what makes a modest or comfortable standard of living in later life (potentially £17,500 and £25,000 respectively). When you take these standards, or the holy grail of a replacement rate of earnings, it is easy to see that the shortfall between the state pension and an adequate income in retirement is significant.

We still need to do more to raise awareness of the income people will receive from the state pension and the fact that many people will need to save (often substantial amounts) on top of the state pension to achieve adequate retirement incomes.

Planning for a comfortable retirement income

One of the obvious downsides of auto-enrolment – a fantastic policy for nudging people into savings – is that what you lose from a policy that responds to apathy is any engagement on the adequacy issue.

The question of how to get people to financially plan and prepare for later life is one we have been asking ourselves at Ageing Better.

  • There is potential in the idea of Mid-life MOTs, an opportunity for a health, financial and work check-in for people in their forties and fifties.
  • There could be a role for employers in enabling greater awareness and engagement of their staff in relation to financial planning.
  • The provision of information, advice and guidance at key triggers – life events and experiences – such as having children, a ‘big’ birthday or when our parents need greater support in later life, might be used to encourage people to act.  

Of course, when it comes to the state pension, Governments need to think about the trade-offs between the impact on individuals and the cost to the state. This report is a helpful contribution to this – locating modelling of alternative indexation scenarios within a wider debate about the role of the state pension and adequacy of income in later life.

At Ageing Better, our ambition is a society where everyone enjoys a good later life. Financial security is a key factor in this.

Claire Turner
Director of Evidence (job share)