A recent 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.
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.
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 can you afford to retire? We anticipate that, within a few years, retirement at 70 will become the norm unless people plan ahead more effectively.
People simply need to start saving earlier, contributing more and or retire later. A 40-year-old needs to be contributing 11 % of their salary into a pension to earn the minimum wage in retirement, assuming an annual return of 5%.
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.