Facing the pension challenge: saving for a century

The number of people in the UK living to the age of 100 is set to soar. Earlier this year, the Office for National Statistics (ONS) announced that it expects there to be more than 50,000 people who are 100 or more by 2050.

Here at Smart Pension, we are concerned by the growing and substantial pension savings gap. By 2050, UK those living past the age of 100, centenarians, could face a combined pension shortfall of up to £21.2 billion, averaging £416,700 each¹.

The reality of a longer retirement

Living to 100 is becoming more common, but what does it mean for retirement planning? According to the ONS, the median pension pot for those nearing retirement is £107,300. Yet to maintain what the Pension and Lifetime Savings Association calls just a moderate lifestyle in retirement, a retiree would need an annual income of £31,300, and therefore a pension pot of at least £524,000, assuming they live for 33 years in retirement.

For those willing to live on a minimum annual retirement income of £14,400, a pension pot of around £77,000 could cover their costs. However, this would mean living a very basic lifestyle while potentially not covering unexpected expenses, in particular healthcare costs, which can be substantial. 10% of men and over 20% of women over the age of 90 are in care homes. On average, it costs around £800 per week for a place in a care home and £1,078 per week for a place in a nursing home, according to Age UK – costs which far exceed both minimum and moderate annual retirement incomes

Key strategies for savers

1. Understand your personal circumstances – Savers need to get an understanding of how many years of retirement they will need to plan for. They can use Smart Pension’s online tool to estimate their life expectancy.
2.  Start saving early and consistently – Time is a saver’s ally in pension saving, especially for those who will live to 100 and beyond. Even small contributions made early in a career can grow significantly through the power of compounding returns. Consistent and early saving is crucial.
3. Maximise ‘matching’ employer contributions – If possible, savers should think about contributing more than the minimum into their workplace pension. Employers often match contributions up to a certain percentage, so it’s beneficial to take advantage of this.
4. Embracing a ‘transition into retirement’ and potential career change – Many savers at, or near retirement, are thinking about how to supplement their pension with other forms of income. This could be taking up part-time work, or switching careers as retirement approaches.‍
5. Managing the risk of inflation – With long retirements it’s even more important to continue investing a pension beyond retirement, so that savings don’t stagnate and instead continue to grow, offsetting the effects of inflation. Most pension providers offer options to continue investing or to convert savings into a product like an annuity, which offers a certain income for life and some of which have inflation protection built in. At the point of retirement, retirees should consider carefully how they take and store their savings to protect them during the rest of their life.

The role of employers and government

Employers should evaluate whether they can increase their pension contributions, potentially matching higher employee contributions. The government also has a role to play by setting a clear agenda for increasing savings rates and ensuring that policies encourage sufficient pension savings for a sustainable retirement.

The future

By understanding life expectancy, starting to save early, and maximising employer contributions, savers can better prepare for a financially secure and fulfilling retirement. Addressing these challenges collectively can help mitigate the looming pension shortfall and ensure a robust financial future for the UK's future centenarians.

Watch our video on facing the pension challenge here

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¹ Assumptions: 33 years of retirement (age 67-100), moderate annual retirement income of £31,300, inflation at 3.5% pa, investment growth at 5% pa.