How better retirement support can help employees avoid savings shortfalls

Based on current spending rates, many retirees could be set to empty their DC retirement savings account by their late 70s – leaving nine years of unfunded retirement on average. Jayesh Patel, head of DC clients at Legal & General, discusses how to help employees better plan for the duration of their retirement years.

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Our latest research examines the lottery effect of retirement. With the average life expectancy of a current 60-year-old in the UK being 86, some retirees are facing nearly a decade shortfall* after spending their retirement savings too quickly.

Behavioural experts suggest this could be down to ‘the lottery effect’, where the psychological rush of having overnight access to large sums of money can spark impulsive or unsustainable spending.

We surveyed around 3,000 people over the age of 50 in the UK. One in seven (15%) felt the cash lump sum of their retirement savings was like an unexpected financial bonus, rather than considering it as part of their long-term savings plans.

Many people underestimate how long retirement lasts. The new reality is that retirement savings need to stretch across decades. Not only maintaining a lifestyle and covering the cost of essentials, but potential later-life care costs too.

Retirement regret

Almost half (46%) said they accessed the cash simply because they could, just to have it to hand. One in seven (14%) who accessed cash from their retirement savings had regrets about doing so or spent more than they planned.

The majority (58%) of those surveyed accessed their pension without seeking any formal advice or guidance from their pension provider, an adviser or from support services like MoneyHelper.

Among those with spending regrets, more than one in 10 (11%) admitted they didn’t fully understand the impact of their decisions.

The need for guidance

All of this highlights a knowledge gap. Those who take cash out of their retirement savings to put in a current account or just to have to hand, miss out on the potential rewards of keeping their savings invested – which can be far greater than cash savings.

We’re helping to bridge the guidance gap by developing new innovative solutions to help DC clients and members understand their options as they approach and then navigate retirement.

For example, our guided retirement planner helps pension members over 55 better plan for the duration of their retirement years.

For most people, their retirement savings is the largest sum of money they’ll have access to, and after decades of hard work and saving, it’s natural to view it as a well-deserved reward. However, with people generally living longer, it’s important to map out a long-term savings plan that considers the full retirement journey and different options available.

^{*Calculations are based on the following assumptions:

•   Inflation = 2.5% p.a.

•   Expected life expectancies from Office of National Statistics calculator: Life expectancy calculator - Office for National Statistics.

•   Investment return on pension pot calculated based on CAPA average portfolio one day before state pension age (as at 31 December 2023), with 33% held in equities (5.5% p.a.).}