Is retiring in your 60s just a pipedream?
Written on 15 February 2016
Young people starting out in their careers will have to work until they’re 77 just to enjoy the same level of pension as their parents, warns a new report out today from Royal London.
And those who start to save later or who have career breaks could find themselves working into their eighties if they want the same retirement lifestyle as the previous generation.
Not paying enough
The problem stems from the much lower amounts of money going into people’s pensions says the report. In some cases the amount being paid in per person is only one third of what it used to be.
In the past, combined employer and employee contributions to final salary pensions (also known as defined benefit pensions) averaged 20% of a person’s wages, with most of the money being contributed by the employer. Someone with this type of pension could typically expect a retirement income from age 65 of around two-thirds of their pre-retirement earnings. Not only that but this income would be protected from inflation and when they died their spouse would usually get a pension of at least half the amount.
But these generous final salary schemes have been dying out and some experts predict that there will be no open final salary schemes in the UK’s largest 250 companies by the end of the year.
The good news is that the government has introduced automatic enrolment which means almost all workers have been or will be signed up to a pension by their employer. But employers and employees currently only have to pay a combined minimum of 2% of ‘qualifying earnings’ (anything over £5,824 and below £42,385) into the pension. And although this is rising to 5% and then 8% by April 2019, the amounts being saved will still be far less than in the days of final salary schemes.
“Getting millions more people saving through automatic enrolment is a huge step forward, but many face a cruel disappointment if they think that the current minimum contribution levels will deliver them the sort of retirement they are looking for. Without significant increases in contributions, we could be witnessing the death of retirement,” says Steve Webb, director of policy at Royal London.
How long will you need to work for?
The analysis by Royal London shows*:
- A 22-year old on the national average wage (£27, 600) who contributes the minimum amount to their pension will have to work until age 77 to achieve a ‘gold standard’ pension (two-thirds of their pre-retirement income) or to age 71 to achieve a ‘silver standard’ pension (half of their pre-retirement income).
- A 22-year old on double the national average wage who contributes the minimum amount to their pension will have to work until age 85 for a gold standard pension and age 80 for a silver standard pension.
- A 35-year old on the national average wage who starts to contribute the minimum amount to their pension will have to work until age 79 for a gold standard pension and age 73 for a silver standard pension.
- A 45-year old on the national average wage who starts to contribute the minimum amount to their pension will have to work until age 81 (gold standard pension) or age 75 (silver standard pension).
All these figures are based on a pension provided by an annuity which includes inflation protection and a spouse’s pension. These features are very useful but costly. If you don’t choose these features it’s possible to reach a gold or silver standard pension sooner. For example, the 22-year old on a national average wage could achieve a gold standard pension by age 73 and a silver standard one by age 67.
How much is enough?
Someone starting work today and stopping at age 68 (their current state pension age) would need pension contributions of 25.1% of their qualifying earnings to get a gold standard pension or 13.8% for a silver standard one, with inflation protection and a spouse’s pension. Without these extras they’d need to contribute 13.8% or 7.6% of their income respectively, says the report. But the buying power of their retirement income would reduce over time and their spouse wouldn’t receive any pension when they die.
You can find out more about pensions in our pensions and retirement guides.
*For details of the assumptions used, see the full report.