Why high earners could be in for a shock in retirement: Sarah Coles

The good news for Yorkshire is that several areas in the county do far better than this. The most resilient of all in the UK when it comes to pensions is Craven, where 56% of people are on track. York, meanwhile, makes it to 5th place with 54% on track and Ryedale is 6th with 53% on track.

The downside is that this isn’t necessarily a sign that these areas are flourishing financially, because lower earners are actually more likely to have enough in their pension than higher earners. The highest 20% earning households have the biggest pension gap - of £64,800. This compares to a gap of £1,250 among the lowest earners. It means that those who earn the most are in for the biggest shocks in retirement – unless they grasp the nettle now.

This feels counterintuitive, but comes down to what people need when they retire. The figures look at what’s known as a ‘target replacement rate’. This works on the basis that the higher your income while you’re working, the better the lifestyle you will want in retirement, and so the more you will need to set aside. For the average earner, the target is two thirds of your earnings, for lower earners the target is more than 70%, and for high earning households it’s around 50%. The measurement also has a bare minimum baked in, to make sure that a very low earner will have enough to cover the absolute essentials in retirement.

Many of the other ways of measuring whether you have enough in your pension will opt for a pounds and pence figure, which is always going to flatter the savings of higher earners and worry those on lower incomes. This way reveals that huge number of lower earners are actually on track – because their income needs will be covered by the automatic enrolment minimum and the state pension.

It means that no matter what you earn and what you save, it’s vital to find out where you stand. This can take a little while, but like clearing out the understairs cupboard, you need to drag everything out in the open before you start. If you don’t have paperwork for all the pensions you’ve built up over time, make a list of everywhere you’ve worked where you think you may have had a pension and get in touch with the government’s Pension Tracing Service. This will provide contact details for all the providers, so you can get in touch and unearth all your retirement savings.

Once you know what you have, you need to put the details into an online pension calculator. This will also ask you to include your current salary, an idea of how much you’re paying in at the moment, and the age at which you want to retire. It will then show you if you’re on track.

Once you’ve tracked all your pensions down, you may decide that the best thing to do is consolidate them all in one place, so rather than stuffing everything back into the understairs cupboard, you thin out the clutter. This can save you a lot of time, admin and even cost. You also get to see how your pension is growing more easily, so you can see if you are meeting your goals. However, before you do so, you need to make sure you aren’t potentially falling foul of things like expensive exit fees that you might get with older products. You also need to check that you aren’t missing out on potentially valuable benefits such as guaranteed annuity rates. It’s also worth saying it rarely makes sense to transfer out of a defined benefit pension.

If you’ve already retired, it’s not too late to go through this process. If you have a guaranteed income from your state pension, annuities and defined benefit pensions, you can look at your costs and your income, and calculate the impact of inflation. If you’re spending down a pension through drawdown, you can look at what you’re currently withdrawing and the impact it has had on your pot. Some people will want to speak to a financial adviser. They have tools that can calculate what you’re likely to spend during retirement, and whether you’re currently working your way through too much or too little.

Of course, the pension isn’t the sum total of all your retirement plans. People often have savings and investments outside their pension that they will also use to support themselves in retirement. Overall, 42% of all households have some sort of non-pension investment. When the Barometer factored this in, things looked less bleak. This was particularly the case when it came to self-employed people. If you just look at their pension, only 36% are on track for the retirement income their need, whereas if you include savings and investments beyond the pension, it rises to 47%. It’s still far from ideal, but it’s not as bad as it seems. It means it’s worth factoring in everything else you have – whether it’s savings and investments or whether you plan to downsize. It will all make a difference.

The process will take time, and if you’re worried about what you might find, it can be tempting to put it off. However, like clearing out the understairs cupboard, the sooner you get cracking, the less chaos you will have to deal with, and the easier it will be to get back on track.

Inflation

We know inflation is a bit of a blunt measurement. The Office for National Statistics factors in all sorts of costs to give us a broad idea of how prices are rising, but your own personal inflation rate will depend on what you buy. It’s all very well that caravans and yoga pants are useful ways to get a benchmark, but it’s not so useful if they don’t form part of your regular spending.

It’s why the measurements of costs for specific groups can be eye-opening. The ONS recently found that, overall, household cost inflation was 3.9% in the year to June. However, lower earners were hit harder than higher earners, private renters were hit hardest of all (4.5%), and while overall inflation was lower for retirees, prices still rose 3.8%, which can be incredibly difficult to manage if you are on a fixed income.

Sarah Coles is Head of Personal Finance at Hargreaves Lansdown and co-host of the Switch Your Money On podcast.