Pensions are working harder, for longer

Members’ changing behaviours require a new approach to help their retirement savings last.

When pension freedoms arrived in 2015 giving people access to their DC (Defined Contribution) pensions from the age of 55, few could have anticipated just how much everything would change.

Since then, the size of pension pots has risen. And while the average pot at retirement is £44,000*, many are fortunate enough to have much more.

But, most importantly, people are retiring and accessing their benefits in new ways that work for them. 

End of the hard stop

There’s a big change in how people take their pension. There’s rarely a hard stop when it comes to ‘retirement’ now, with many choosing to take their tax-free cash as soon as they reach 55, continuing to save into their pension as they work on, perhaps on a part-time basis. Our member data shows that one in five people start to access their pension at the age of 55.

But with life expectancy in the UK increasing, pension savings will need to last longer into later life.  A 25-year old employee today has a decent chance of living to their mid- to late 80s**.

And that raises the biggest issue facing pension savers: achieving enough growth from their pension savings to achieve their retirement goals.

That’s why we’re evolving our default investment solution with Scottish Widows Lifetime Investment. It’s been designed to maximise growth potential to support sustainable income in retirement and help address the retirement income adequacy gap.

While the average UK pension pot at retirement is £44,000*, the reality is that almost 10-times as much is needed to give a ‘moderate’ retirement lifestyle of £31,300 a year, according to the Pension and Lifetime Savings Association. ***

Search for growth

Lifetime Investment invests in a mix of assets which will include options to access private market investments later this year, has a high exposure to equities initially and a shorter de-risking phase, leaving pension savings invested in higher-growth assets for longer. All of this aims to boost potential returns and deliver maximum growth.

Make money work harder

The thing people want most is for their money to work hard for them, and the Lifetime Investment will continue to evolve throughout 2025 to deliver a to-and-through retirement option that aims to support members in sustaining income levels for longer.

It will de-risk gradually to the age of 80 to aim to minimise the impact of any market falls as the size of pension pots reduce as people take their benefits.

The good news is that responsible investing strategies can be integrated to support growth and ensure that money invested into a pension grows as environmental changes happen around us, and we have what I’d say is an innovative partnership with international fund manager Robeco to create custom-made, sustainable stock market indices which the Lifetime Investment pension funds track.****

We’ll also be introducing options to access private market investments to further diversify the Lifetime Investment asset mix, such as infrastructure, private credit, venture capital and natural capital. This will be via our own open-architecture Long-Term Asset Fund (LTAF) umbrella.

LTAFs have been specifically created to enable DC pensions to invest in long-term, illiquid assets while carrying certain safeguards and strong disclosure and governance. We’ll have growth and diversified credit LTAFs to better align investment risk and return across the retirement journey.

It’s all part of our drive to help people achieve good outcomes in retirement.

References:  

* ONS data, all pension types, all ages.

**Life expectancy calculator - Office for National Statistics for someone who is currently 25.

***PLSA living standards £31k for a single person moderate lifestyle.

**** www.scottishwidows.co.uk