Men and women now need over £150,000 to fund a basic retirement income
Men and women aged 65 will now have to save £152,800 for their retirement to secure an annual income of £5,000, according to figures released by the Office for National Statistics (ONS).
The figures represents a 27% increase over the last three years for men; while women (who used to pay more for annuities due to their longer life expectancy) will now pay 14% more than they did in 2009 to fund a retirement income of £5,000 a year.
Today's figures, published as part of the ONS's Pension Trends series, shows overall pension saving is rising: the average pension savings of all UK households headed by a 16 to 64-year-old rose from £54,000 in 2006-08 to £79,200 in 2008-10.
But retirement incomes have increased in price due to dwindling annuity rates.
Patrick Connolly, a financial planner at AWD Chase de Vere, explains: "While it is positive the amount of overall pensions savings is increasing, this headline figure hides the huge disparity between different groups of people and also the cost of generating income in retirement has also significantly increased over the year.
"It is typically the older generations who have better pension provision: They have often benefited from generous support from their employers, including much wider access to final salary pension schemes. Many have also benefited from the major increase in house prices over the past 20 years.
"This gives the older generation large amounts of equity in their properties and also means that most have comparatively small if any outstanding mortgages, increasing their disposable income."
He warned that the younger generations struggling to put aside money for their retirement as they save for a house deposit pose a huge problem to the country.
Final salary pension
A defined benefit pension scheme is one where the payout is based on contributions made and the length of service of the employee. A typical scheme would offer to pay one-60th (0.0168%) of final salary (the one you’re earning when you finally retire) for each year of contributions to the scheme (even though these years were probably paid at a lower salary). Someone retiring on a final salary of £30,000 who had been a member of the scheme for 25 years would receive a pension of 42% of their final salary (£12,300 a year before tax). Sadly, many companies are winding up their final salary schemes or closing them altogether, meaning pension benefits accrued after a certain date (or those available to new employees) may be on a less generous money purchase basis.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.