UK pensioners set for a dramatic fall in income
Working people in the UK should expect a dramatic decline in their income when they retire, with the average income falling by more than a third, according to government figures.
People will see their income drop by 39% on average when they retire, according to research based on data by HM Revenue & Customs.
The figures, compiled by annuity provider Partnership, show that while the average income for people in employment in the UK is £19,000, the average pension income is just £11,600.
The firm warned that retirees are likely to suffer "a nasty shock", unless they start to build up savings and investments ahead of finishing work.
Andrew Megson, Partnership's managing director of retirement, said: "While people in retirement are likely to have fewer outgoings, it is still hard to imagine that anyone would not feel the pinch if they lost a third of their income overnight."
Throughout the UK, those living in London suffer the biggest decline in income when they retire. They currently see their income nearly halve, falling from £20,300 to £12,000.
Those retiring in the East of England will also see a major reduction in their income, falling from £19,900 to £11,900, a fall of 40%
On the other end of the scale, those in Dorset saw their income decline by only 29% – from £17,000 to £12,000.
Too little, too late
Tom McPhail, head of research at Hargreaves Landsdown, said that when it comes to pensions, people typically "start too late, save too little and expect too much."
He added: "Everyone should take the time to find out how much is being paid into their retirement savings, what kind of income it might produce and when they can expect to retire. A comfortable retirement won't happen by accident."
Maximising your pension pot
- Take the 'open market option'. This gives you the chance to shop around and make sure you find the most suitable annuity for you. Research by Lloyds TSB shows a retiree with a pension pot of £50,000 could earn up to £792 more a year by taking the open market option instead of accepting what their pension fund provider offers them. Currently, 60% of people in the UK don't shop around.
- Check if you qualify for an enhanced annuity? Enhanced annuities are for those with health problems, paying out a higher percentage of your pension pot yearly.
- Start saving now. Its never to early to start saving for a pension, and the more money you have to invest when you retire the more choice you will have in selecting the one that is right for you.
Open market option
People who have a money purchase or defined contribution pension, at retirement must use their fund (minus an optional 25% as tax-free cash) to purchase an annuity. As the annuity market is very competitive and rates differ vastly between annuity providers on a daily basis, the open market option is your right to shop around and buy the annuity from the company offering the highest rates at that time.
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.