Expensive wage earners may be underestimating the amount they need to amass for a serene retirement.
A new study by financial advisory firm Saltus has revealed a significant gap between the retirement savings expectations of high net worth individuals (HNWIs) and the reality of what is needed to secure a comfortable retirement.
According to the research, HNWIs in the UK, defined as those with assets over £250,000, estimate they need a pension pot of around £663,308 for a comfortable retirement. However, Saltus finds that this is a significant underestimate; to maintain the retirement living standards recommended by Pensions UK, most will actually require at least £1.5 million, with younger respondents potentially needing up to £2.5 million to account for inflation and longevity.
The Pensions UK Retirement Living Standards define a "comfortable retirement" as one providing an annual income of about £43,900. Therefore, despite HNWIs believing they can retire comfortably on significantly smaller pots, Saltus’s analysis, which factors in inflation and realistic income needs, advocates for considerably larger retirement savings to avoid financial shortfall in retirement.
The average 44-year-old in the UK has a mean pension pot of £498,276, contributing £35,105 per year. Assuming the same investment returns and an inflation rate of 2.5%, their pension pot would grow to £2,562,215 by the time they retire, leaving a shortfall of £292,929 for a comfortable retirement. This shortfall falls to zero when adding the state pension on top of these contributions.
However, as individuals age, the shortfall increases. The average 54-year-old in the UK has a mean pension pot of £532,906, contributing £30,239 annually, which would result in a total pot of £1,263,302 upon retirement, leaving a shortfall of £738,296 for a comfortable retirement. For a retiree today, a pension pot of around £2.5 million is needed to account for inflation.
Mike Stimpson, partner at Saltus, stated that there is a disconnect between expectation and reality in retirement planning among high earners. He expressed concern that most people are falling short of their retirement goals and added that changes to inheritance tax that make unused pension count towards an estate will further complicate pension planning.
Stimpson also noted that maintaining the state pension could become unsustainable without reform, as outlined by the Institute for Fiscal Studies in their Pension Review. He suggested that it could therefore be wise for savers to make sure that they will have a comfortable enough pension pot without help from the state to ensure they will not be caught out.
These changes could make pensions less attractive as a wealth transfer tool, particularly for high net worth individuals who rely on them to pass on wealth, according to Stimpson. However, the importance of saving for retirement remains paramount, and Saltus encourages individuals to seek professional advice to help them achieve their retirement goals.
[1] Saltus's data and analysis are based on a survey of 2,000 HNWIs, as well as a review of Pensions UK's Retirement Living Standards report and the Institute for Fiscal Studies' Pension Review.
- High net worth individuals in the UK might need to reevaluate their retirement savings goals, as a pension pot of around £1.5 million is required for a comfortable retirement, according to financial advisory firm Saltus.
- Personal-finance management is crucial for ensuring a comfortable retirement, and seeking professional advice can help HNWIs avoid potential shortfalls in their savings, especially when factoring in inflation, income needs, and changes in pension regulations.
