The annual income required for a relatively modest but comfortable lifestyle in retirement amounts to £17,500, according to a new research report published today by Barclays Corporate and Employer Solutions.

The report, entitled ‘Steps Towards a Living Pension’ introduces the new concept of a Living Pension – the income level defined contribution (DC) pension scheme members feel that they would require to maintain an adequate lifestyle in retirement. In the way that the UK Living Wage is the income from employment that people need to meet their basic needs, the report explores the income that would be needed for a Living Pension to provide a lifestyle in retirement that goes beyond living costs such as food and accommodation.

The research was carried out to provide a fresh perspective on what it is that members really want from retirement and to understand the practical steps that could help them to get there.

Good outcomes

The new report uncovers the findings of extensive research among 2,000 employees paying into a workplace DC pension. Additionally, detailed qualitative interviews were conducted with a cross section of the different generations currently in the workforce to understand scheme members’ perspectives in detail. Barclays’ specialist behavioural finance insights were also deployed to help inform and test practical solutions that could help members of all generations towards a good outcome for their retirement.

In contrast to a commonly held view, the research found that people’s expectations of retirement are in fact relatively modest. Visions of six-month luxury cruises seem to be wide of the mark; the qualitative research revealed that a good outcome is actually described by members as an absence of negatives: not having to worry about making ends meet and not experiencing a painful drop in living standards. The research found that the top three ‘must haves’ for a desirable lifestyle in later life, in addition to essential living costs, are being able to pay off money owed, taking an annual two-week holiday abroad and being able to run a car. It was from these relatively modest ambitions for retirement that the report was able to calculate that a Living Pension amounts to £17,500 a year on average. This figure differs slightly across the generations from £18,200 for generation Y (age 19 – 33), £17,200 for Generation X ( Age 34 – 53) and £17,300 for Baby Boomers (54 -69) due to varying aspirations.

Whose responsibility is it anyway?

While DC members see financial planning for later life as primarily their responsibility (93% agree that individuals should bear the responsibility for ensuring they have enough money to live on in retirement), they are also looking for support from Government and from their employer. Two thirds of members(66%) think that this responsibility should be shared with Government and 47% look to their employer to play a role.

The research clearly demonstrates that employees want more guidance and support when it comes to preparing for retirement.  82% of DC scheme members would welcome help from their employer, specifically to build a wider understanding of what their current and future contributions mean for what they will have in retirement and ultimately, how this stacks up against their lifestyle expectations.

Interventions to make a difference

That means supporting them to understand their goal in terms of income at retirement and the contributions they need to make now in order to achieve this. Seven in 10 members (70%) would welcome personalised emails about pension saving which emphasise what they stand to lose by not contributing and 67% want to authorise their employer to increase their savings at the time of their next pay raise.

Specifically the report calls for employers to help scheme members to understand what all of their sources of income could amount to in retirement. This includes how much money they will receive from their state and DC pensions and subsequently what their annual income will look like when they retire. DC scheme members would also like employers to help them understand more about their current financial situation and ensure that they are on track for their retirement. This is so the DC members can build a holistic view of their retirement and expected earnings.

When it comes to DC members’ expectation of retirement, the report shows that the gap between people’s expectations and the outcome their current behaviour will yield is not insignificant, but many could rebalance with a few simple measures. People are anxious about having enough money in later life but are prepared to economise and make sacrifices to enjoy the retirement they want. 78% of respondents expect to work until later in life than their parents and more than half of members (54%) expect to watch what they spend more closely in retirement.

Jonathan Parker, Head of Investment Proposition at Barclays Corporate & Employer Solutions, said: “This report shows that, while people believe that it is their responsibility to make sure they have enough money to live on in their retirement, they can be anxious about making decisions around pensions and may not feel equipped to make a plan alone. There is a clear role here for the employer to offer this much sought-after support and guidance.

“However we understand that this can equally be a tough task for employers and have developed a toolkit to aid them in this undertaking. Our toolkit shows that a simple way of supporting employees is by identifying their individual needs and establishing a Living Pension benchmark for them to work towards. Further to this an employer can use some smart defaults to their pension schemes so that it has good value charges and has periodic individual pension well-being check reminders.

“The research found that people’s expectations for their retirement are relatively modest and the report suggests that a gradual increase of the automatic enrolment minimum contribution rates from 8% to 12% over time, coupled with greater education and guidance in the workplace could steer DC members towards better outcomes.”