You'll need £220,000 for a minimum wage in your retirement
Britain's pensioners face a bleak future because their savings are insufficient to avoid life on the breadline in their old age, Julian Knight reveals
Saturday 08 June 2013
If you didn't believe that British pensions were in crisis you may do now. According to research from the advice firm Liberty SIPP and The Independent on Sunday the average worker is facing a bleak old age surviving on a private or company pension equivalent to only one-seventh of the national minimum wage.
The survey, based on current rates of investment return and at today's prices, shows that to buy an income equivalent to the national minimum wage – just £12,115 per year – Britons have to save up a pension pot of £220,776. However that is more than seven times the current average pension pot that Britons manage to scrimp together prior to retirement.
"It's widely known that many pensioners are on the breadline but when you think that the typical retirement income will be just one-seventh of the minimum wage, it relays the true extent of the problem we're dealing with. People need to start saving, and saving regularly, if they are to avoid pension poverty," John Fox, managing director of Liberty SIPP, said.
And what's more, with record government borrowing and all-time low interest rates, the amount of retirement income a pension pot can buy is declining all the time. For example, a pension pot of £100,000 (more than three times the average) could have bought an income of around £7,000 a year in 2004 but will now provide less than £5,000. As a result, the amount of money needed to secure just the national minimum wage could increase further, particularly when increased longevity – with the average 25-year- old likely to live until at least 90 – is factored in.
Most people significantly underestimate both how long they will live in retirement and how much money they are going to need to live on.
Tom McPhail, head of research at the advice firm Hargreaves Lansdown, said: "Typically, people start saving too late, save too little and expect too much. Linking projected post-retirement income to current earnings makes sense as it helps to plan that transition from work to retirement.
"The other key question is when they can afford to retire. We anticipate that, within a few years, retirement at 70 will become the norm unless people plan ahead."
Mr Fox's prescription is that people simply have to start saving earlier, contribute more and or retire later. He estimates that a 40-year-old needs to be contributing a minimum 11 per cent of their salary to earn the minimum wage in retirement, and that is presuming a punchy average annual investment return of 5 per cent and surrendering the right to take up a 25 per cent lump sum, something that very few pension savers do now.
However, looking to the pensions landscape, the drift is still towards less substantial workplace pension provision. Auto enrolment, which started to be rolled out last October, will see millions more people hold a workplace pension scheme, but the contribution levels are so low as to barely touch the issue.
At the same time, there are worrying moves by some large employers in effect to reduce the pensions of staff. There is the continuing closure of final salary schemes – DHL last month said it was considering this – but on top of this now there is a new spectre: firms looking to agree cuts to pension benefits with retiring or retired staff. Last week BT said that it would offer 120,000 retired members of its scheme a Pension Increase Exchange (PIE) – the option of receiving lower pension increases in the future in exchange for a higher starting pension.
The move closely followed BT revealing that its pension scheme deficit had more than doubled over the past year to £5.7bn, despite a global stock market boom.
In effect scheme members are being offered a higher starting income but the longer they live the more their income is likely to be eroded by inflation, which although not a huge factor now may become so in the future due in part to very loose government fiscal policy.
"For BT this is a way to reduce the risk of inflation on their own financial position. Every person who takes a fixed income is far more attractive to the BT pension scheme," William Hunter, director of Hunter Wealth Management, said.
Mr Hunter adds that pension holders need to tread very carefully before signing up to the deal: "Inflation can make a real dent into a pension and if you are not protected from it your income can suffer quite significantly. If someone has any doubts, they should seek advice."
BT's move to offer a PIE to scheme members may be the first of many as firms look to limit their future pension liabilities. Other former public sector enterprises (BT was privatised in the mid-1980s) are believed to be watching developments closely as they tend to have large numbers of retired staff to whom they are paying a pension, but with far fewer current workers in the pension schemes to help them pay for pension provision.
Simon Nicol, pension director for Broadstone Pensions & Investments, says the decision whether to take a PIE offer from an employer requires a bout of cold, hard decision-making: "When weighing up what to do, pensioners should consider their attitude to cash flow. Would they prefer more money in the short term (when you may be more active) or later in life (when health care bills may be higher)? Individuals need to consider their attitude to their future time on this mortal coil… not an easy or pleasant thing to think about."
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