New research from the Institute and Faculty of Actuaries (IFoA) indicates that many individuals are unaware of the long-term financial consequences of life decisions that could reduce their pension savings by hundreds of thousands of pounds.
The IFoA’s study, “How much could you lose? Opening the conversation on closing the pensions gap,” uses actuarial modelling to examine the effects of various life choices on pension savings. The research identifies several barriers to retirement savings that contribute to “pensions gaps,” which are defined as the differences in pension savings and retirement income between different groups.
The report outlines six significant life events that can negatively impact pension savings. These include not starting a pension, which can lead to a potential loss of £300,000, and opting out of a pension, which could result in a reduction of £100,000.
Not taking advantage of extra employer contributions may also result in a £100,000 shortfall. Maternity leave for six months is linked to a £30,000 loss, while divorce can also have a variable impact, depending on the financial arrangements between couples. Additionally, moving from full-time to part-time work is associated with a potential £200,000 decrease in pension savings.
Individuals who delay starting a pension are at greater risk of experiencing significant losses. For example, a person beginning a pension at age 35 instead of 25 may accumulate only £500,000 in their pension pot by retirement, compared to £800,000 if they had started earlier.
The IFoA’s recommendations to address these pension gaps target governments, employers, and individuals. The suggestions include establishing long-term, equitable pension policies and encouraging proactive measures by governments and employers to support pension savings.
Additionally, the association said that individuals are advised to take steps to safeguard themselves from potential pension gaps.
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Alexandra Miles, a member of the IFoA Pensions Gap working party, stated that many individuals are unaware of the significant sums of money they could lose due to pivotal life moments, and that short-term decisions can have long-lasting effects on their pension savings.
She noted that for those who experience multiple significant life events, the impact on retirement savings can be compounded. Miles emphasised that while the data reveals the extent of the pension gap problem, action must be taken to overcome both structural and attitudinal barriers that prevent people from saving effectively for retirement.
Miles also pointed out that the recommendations in the research are tailored to governments, employers, and individuals, focusing on equitable and long-term policies, as well as the necessary support systems to help individuals manage key life events that affect their pensions.
IFoA president Kartina Tahir Thomson (pictured above) echoed these sentiments, pointing out that the numbers in the report highlight how much individuals could be at risk when making significant life decisions. She noted that many people are unaware of the hidden costs of these decisions, which may not become evident until later in life, when they could be in a more vulnerable financial position.
Thomson emphasised that the research exemplifies the critical role actuaries play in working with industry and other stakeholders to bring attention to areas of concern and outlining practical steps to address them.
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