Nearly half of Britain’s retirees don’t have enough savings for a rainy day, with those forced to rent much more likely to struggle to save up than those with a mortgage, new research shows.
Around 46 per cent of people approach retirement with not enough emergency savings, according to a survey of 10,030 UK adults by Focaldata carried out in June for investing platform Hargreaves Lansdown.
But many are unaware of this financial jeopardy. More than one in five retirees, or 21 per cent, think they have plenty of money set aside for unexpected expenses, like having to change a broken boiler, when in fact they do not.
Saving for retirement: Not having enough is a worry for around 37% of people, a survey shows
Not having a financial safety net is a worry for around 37 per cent of people, although that proportion falls to just 17 per cent of those aged 65 and over.
Those in that age category are most likely to describe themselves in good or excellent financial shape – 49 per cent compared to 33 per cent overall.
‘It’s easy to see why they’re more confident about their resilience than their working age counterparts,’ said Sarah Coles, personal finance analyst at Hargreaves Lansdown.
‘They’re more likely to have money set aside for emergencies, and they’re less likely to worry about a lack of savings. Many have also fared better financially during the crisis, especially those on a guaranteed income.
‘However, this doesn’t mean they’re in the clear, because many of them don’t realise quite how much of a safety net they need at this stage in life, so almost half don’t have enough set aside for emergencies.’
The survey also shows that some fall horribly short, with one in 12, or 8 per cent, able to cover essential expenses for less than a month from savings.
And one in six, or 16 per cent, are able to cover just up to three months’ worth.
However, as a rule of thumb, most people should have between three to six months’ worth of essential expenses set aside in a ‘competitive’ easy access account, according to Hargreaves Lansdown.
After retirement, that requirement grows to one to three years’ worth, since you no longer have earnings coming in every month and don’t have the same financial capability to meet many one-off costs as when you were working.
Perhaps unsurprisingly, money going into a landlord’s pockets every month restricts saving, with research showing this compromises financial resilience across all generations.
Renters struggle more than home buyers to build savings safety net
Renters are much more likely to struggle to build a financial safety net throughout their lives than those who pay a mortgage.
When asked how long their savings would last if they lost their income, nearly two thirds (64 per cent) of renters said less than three months.
That compares to a much smaller 44 per cent of those with mortgages and just 15 per cent of those who own outright.
While you might think this is skewed by younger people, because they are more likely to rent and less likely to have had time to build up savings, research shows it actually gets worse as people get older.
Having to pay rent hammers financial resilience across all generations, research shows
Among those aged 25-34, some 64 per cent of renters have less than three months of expenses in savings, while 40 per cent of owners do.
But among those aged 55-64, the gap between renters and home owners widens.
Around 60 per cent of renters still have less than three months of expenses as savings, but among owners this has dropped to 22 per cent.
‘Clearly those who are renting later in life are struggling to build their savings,’ said Sarah Coles, personal finance analyst at Hargreaves Lansdown.
‘This has much to do with the fact that when you’re renting, the cost of housing takes up a larger proportion of your income than the mortgages of those who own. It means living on the back foot, and it’s much harder to build your financial resilience.’
In fact, half of renters save less than £50 a month, whereas a quarter of owners save more than £150 a month.
And when asked what they would do with a windfall, the top three answers for renters was paying the bills, followed by saving for the future and repaying debts.
Fewer owners needed a windfall to pay the bills, so their top answers were putting the money aside as savings, then repaying debts and then they were equally split between paying bills and buying non-essentials.
It’s no wonder that only 18 per cent of those who rent believe their finances are in good shape, compared to 43 per cent of owners.
How much cash do you need to cover expenses in retirement?
HL’s calculations show that the average person living alone in retirement would need £15,512 in cash for one year, and £46,535 for three years, if they covered all their outgoings.
However, that drops to between £8,897 and £26,692 if they excluded the non-essentials they felt they could do without.
For couples, the figures are between £34,960 for a year, and £104,897 for three years, if they covered all their outgoings, but between £16,988 and £50,965 if they excluded the non-essentials.
Recent separate research suggested that a savings pot of around £17,465 is necessary ‘to feel financially secure’.
|12 MONTHS||One adult||Two adults||3 YEARS||One adult||Two adults|
|Non Essential||£6,614||£17,971||Non Essential||£19,843||£53,914|
|Essential + comfortable||£8,897||£16,988||Essential + comfortable||£26,692||£50,965|
|Source: Hargreaves Lansdown|
What can you do?
HL says once you’re retired, you can allocate a portion of the tax-free cash from your pension as a safety net.
‘You don’t have to take all your tax-free cash upfront, which could leave you with too much in cash over the long term.
‘Instead, you can move a portion of your pension pot into drawdown and use the tax-free cash from that as your emergency fund, while you leave the rest in your pension pot to grow.
‘So, for example, if you have a £100,000 pension and want an emergency fund of £12,500, you can move £50,000 of your pension into drawdown, take £12,500 as tax free cash, and leave the rest where it is.’
Where should this cash be?
It might be wise to lock up your cash for a little longer, as that way you can earn more interest.
‘Right now, for example, you can make up to 0.65% on easy access savings, but up to 1.5% by fixing for a year and 1.75% by fixing for two,’ HL says.
‘If you’re worried about keeping track of a number of savings accounts, and remembering to switch them when the fixed periods come to an end, it’s worth considering a savings platform.
‘These allow you to pick accounts from a number of different banks, see everything in one place, and switch in a handful of clicks.’
Five steps to build financial resilience
HL has outlined five steps to take in order to build financial resilience:
1. Control your debt – debt isn’t in itself a bad thing, but ensuring you can use it for your benefit rather being controlled by it is crucial. High cost debt can be particularly damaging for your finances.
2. Protect your family – no one is immune to something going wrong, and if something happens to you, it can hurt your loved ones. That’s why things like protection insurance, the death benefits on workplace pensions and writing a will are so essential.
3. Save for a rainy day – it’s impossible to predict when things could go wrong, so it’s important to get ahead of the game by building a cash buffer for unexpected emergencies.
4. Plan for later life – we can’t just focus on what’s around the corner, so we need to think about the long-term too. Getting to grips with your pension and making sure you’re building a large enough pot for retirement will help protect you when you finish work.
5. Invest to make more of your money – once you have built your short term resilience and are confident in your pension savings, you can consider investing, which gives you the opportunity to make your money work harder for you.
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