Workers in the UK who earn the average salary of £26,000 per year will be £6,000 short a year for a comfortable retirement.
Pensions company, Hargreaves Lansdown, have released figures that show just how financially unprepared for retirement many Britons are.
Even pension reforms bought in by the coalition will not be enough to force most Brits to save more towards their retirement.
Auto-enrolment for company pensions and the £140 a week state pension will not solve the issues of under-saving, and more Brits will find themselves having to fund their own retirement or work until much later in life.
A 35 year old taking home the average salary of £26,000 per year who relies on the state pension and auto-enrolment, will have a pension income of £11,000. The Government’s Pensions Commission worked out in 2005 that people should be looking to get £17,000 a year for a reasonably comfortable retirement.
Tom McPhail, Head of Pensions at Hargreaves Landsown, worries that many people will face a ‘catastrophic’ income crash once they retire if they don’t have other savings as well.
He goes on to say that people must understand that there will be a looming pensions gap in the UK and that it will be down to the individual to bridge the gap.
“There is no one policy measure that can fix this crisis on its own but a number of major initiatives, including state pension overhaul and auto-enrolment, which will take us a long way towards it,” he says.
“By no means is it mission accomplished, though. The changes over the next few years will only create the environment where it is possible for everyone to save for retirement – that doesn’t exist at the moment.”
The government are introducing a scheme where each employee in the UK will be automatically enrolled into a company pension scheme. The new system is due to roll out in 2012 starting with large corporations, by 2016 even the smallest of firms will have to offer its employees a pension scheme.
Alongside this, a new flat rate state pension of £140 will be introduced in a major overhaul of the current complicated pension system.
However, middle-earning Brits are finding themselves in a pension gap quandary.
The Pension Commission had said that an employee earning £26,000 a year should be looking for a pension that is 67% of their annual income.
If they contribute the minimum, flat rate amount of 8% to their auto-enrolment pension fund they would only achieve 44% of their annual income in their pension.
A 35 year old who earns £50,000 a year and relies on both the state pension and their auto-enrolment scheme will find their target even harder to achieve. Their pension would be £13,643 a year, a shortfall of £11,357 and just 27% of their annual salary.
To ensure that this shortfall doesn’t happen, the person earning £26,000 would need to save another £220 a month, the person earning £50,000 would need to save an extra £405 a month.
Financial experts agree that the money doesn’t need to be saved in a pension scheme. An independent financial adviser at Evolve, Jason Witcombe, said: “You don’t need to take a one-dimensional approach,”
“It doesn’t have to be a pension. If the tax relief works for you then of course it’s a good option. But paying down a mortgage is just as valid, as is Isa investing.”
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