Half of pre-retirement pension savers think that £1 million would be enough to lead a golden retirement, according to research from Investec Wealth and Investment.
However, the asset management company is warning that with inflation set to rise above its long-term average rate in 2017, by 2043 the value of £1 million could have halved in real terms.
Investec claims that in 27 years’ time a saver drawing an income of 4% would get an income of £40,000 from a £1m pot. However, once inflation is taken into account its value in real terms is likely to be closer to £20,000 - £7,000 less than the average UK salary.
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The research, amongst people aged between 35 and 54, found that 26% expected their private pension to replace half their current salary, while 7% expected to match it. In reality, Investec says their pension is more likely to replace just a third of their working income.
“Savers overestimate income from their pensions”
Commenting on the findings, Simon Bashorun, financial planning director for the company says investors’ expectations are often unrealistic: “Many pension savers in their 30s and 40s think a pension pot reaching the lifetime allowance of £1 million will pay for a gold-plated retirement but our research suggests otherwise.
“With inflation expected to continue rising, pension pots and savings in general will be worth much less in the future. Many savers tend to forget this when they’re drawing up their retirement objectives and end up overestimating how much income they will receive. As higher earners with a decent private pension tend to get around a third of their salary, this can turn out to be an unpleasant surprise.
“A significant increase in the lifetime allowance limit of £1m seems unlikely in the near future, and so people looking forward to enjoying a comfortable retirement shouldn’t rely solely on their pension but instead spread their investments across other tax-efficient vehicles such as individual savings accounts (Isas).”