Five steps to better pensions

Simon Sarker and Alyshia HarringtonClark explain why we need a new approach to pension savings, and how the PLSA is supporting it.

Part of the PLSA’s purpose is to help everyone achieve a better income in retirement – or at the very least an adequate one. The current cost-of-living crisis has provided a stark reminder of the impact on individuals and families when their income becomes unable to keep pace with the cost pressures on their household budgets. Too many in the UK also risk future financial shocks from inadequate pensions income.

But how can we determine whether a person or household has enough for an adequate income in retirement? There are two key ways of conceptualising this: Proportional income targets. This is the approach that the Pensions Commission used to address adequacy in 2005. The target works on the basis that an individual’s retirement income should achieve a proportion of their working income immediately preceding retirement. The target replacement rates reduce according to the levels of earnings, so those with the lowest earnings prior to retirement need to maintain almost all of their income into retirement – for example, someone earning £15,000 will need to replace around 80% of their income. Someone on a higher income may not need such a high replacement rate, as in theory they face lower costs, such as low or no mortgage payments and reduced discretionary spending. However, there is research to show that most people want to try to maintain their living standards when they retire, not reduce them. So, we may need a different approach to calculating adequacy.