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The Perils of Savings Gaps and Their Impact on Retirement

At some point in our lives, most people will experience a period of financial constraint brought about by an unexpected, or unplanned for, event.

At some point in our lives, most people will experience a period of financial constraint brought about by an unexpected, or unplanned for, event. Whether this prompts some small-scale cutting-back on luxuries or a total overhaul of the way we live, losing a job, having a family or witnessing a global economic downturn can have a major impact on our financial health at the time, and for years to come.

According to our new Future of Retirement survey of over 15,000 people across 15 markets, more than seven out of 10 people in the UK have seen their ability to save for retirement significantly affected by one of these life events. The economic downturn was one of the most frequently cited events, with one in four working age people reporting it had impacted upon their ability to save for retirement. Of those affected, 34% of people across the UK have had to stop saving for retirement altogether.

Our latest report, published today, explores the worrying side-effects of these events, revealing that the life event with the biggest impact can stop retirement savings for an average of five years. While these gaps may initially appear only temporary, they can have profound long-term effects. In fact, our research has found that, once losses in interest and investment growth are taken into account, such five year gaps can leave serious holes resulting in losses to the average UK retirement pot of up to £6,600 for a man and £4,080 for a woman.

The impact of life events doesn't stop there; almost one third of non-retired people globally admitted that they would dip into their retirement pot to cope with life events such as buying a home or paying for children's education. While it is understandable that people frequently prioritise short-term needs in times of financial strain, it is critical that they also remain aware of the longer-term picture.

A reluctance to curb short term spending in tough times is exacerbating the situation - when asked to choose, almost half (43%) of those not yet fully retired are willing to prioritise saving to go on holiday over saving for their retirement, with this figure increasing to a staggering 58% of people in the UK. This focus on the present is one of the most troubling signs of economic woe, with 59% of UK respondents who have never saved for retirement blaming this on the cost of day-to-day living expenses.

While life events having an impact on people's ability to save is a global phenomenon, so too are high expectations for standards of living in retirement. Our research found that irrespective of the recent tough economic conditions, people are reluctant to let go of their dreams for retirement. Taking frequent holidays, home improvements and new hobbies were all named as some of the most popular, and costly, retirement aspirations among working people.

If people want to meet these retirement goals, they must take action to successfully navigate unexpected savings shocks and the uncertainty that life events can incur.

To do this, we recommend five key actions to help improve people's financial well-being in retirement:

Action 1: Get real about your retirement needs

Through education and guidance from financial advisers, you will be able to better understand how much income you will need in retirement and how to better prepare for all the financial risks associated with growing older.

Action 2: Put your savings priorities in order

Work out a realistic budget that works for you and make sure that your long-term financial planning, including the need to save for retirement, isn't overlooked against what might seem like more pressing financial needs. Ring-fencing even a small amount of monthly income towards retirement planning can help to make a major difference in the future.

Action 3: Be aware of how major life events affect saving for retirement

You never know when a life event may impact your savings, so where possible, you need to ensure that you have access to some emergency savings and investments as well as appropriate insurance to deal with periods of unemployment and long-term illness which may prevent you from working.

Action 4: Make a plan for the future

Any type of financial planning for retirement, including informal ways such as using online planning tools or 'to-do' lists, is a good starting point. Eventually you should seek to draw up a detailed written plan for the future, which should be reviewed regularly.

Action 5: Use professional advice to improve your savings position

Reviewing your savings situation and retirement potential with a professional financial adviser now can help to ensure that all your future retirement needs are identified and that comprehensive plans are put in place.

Our latest report revealed that 66% of Britons are not preparing adequately or at all for a comfortable retirement, compared to 56% of non-retired people worldwide. Unless savers take action now, not only will they be unable to meet their retirement aspirations, but they may struggle to have their housing, healthcare and other basic needs met in later life. Long term planning is key to ensuring that the next generation of retirees realise the future they want - we should all start saving today to avoid disappointment tomorrow.