10% pension contributions 'not enough'

By PHILIP SCOTT
Updated:

 

Workers looking to retire in 20 years time drastically need to hike their work pension contributions if they wish to achieve their desired level of income in retirement.

woman worried about her finances

Insufficient: Workers need to up their pension contributions

Independent charity organisation, the Pensions Policy Institute, said workers on average earnings contributing 10% to their pension and who are set to retire in 2030 are very unlikely to replicate their standard of living when they stop working.

The news will come as a blow to those who believe they are being prudent by setting aside a tenth of their salary for retirement.

The PPI says that workers need to hike their contributions into defined benefit, or money purchase schemes, which are linked to the stock market by at least 50%.

That means they need to be putting in at least 15% of their salary to retire comfortably.

Chris Curry, at the PPI, said: 'Many median earners who contribute to defined contribution pensions at average levels of 10% of salary are unlikely to have sufficient state and private pension income to achieve a desired standard of living in retirement.

'In order to provide their desired retirement income solely through the state and private pensions, median earners reaching state pension age in 2030 may need to have around 15% of their salary contributed to their private pension.'

In addition, the PPI asserted that in the future, many pensioners will have to rely on a greater variety of income sources and assets, including their property in order to be able to support themselves during retirement.

Curry added: 'Many people will need to contribute more to their pension during working life, work longer, or run down savings, investments or housing wealth to achieve a standard of living in retirement they might consider acceptable.'

The PPI's research further bolsters the fact the millions of workers, are losing their battle against the UK's pension crisis.

Those lucky enough to be members of gold-plated but near extinct final salary schemes, or defined benefit, can look forward to an income of typically some two-thirds of their final salary in retirement, after 40 years service. The payout from final salary pensions is guaranteed and inflation-proof.

But last year more than 75,000 private-sector workers were robbed of their final-salary pensions and trade body, the Association of Consulting Actuaries, has warned that final-salary pensions in the private sector which accept new joiners are 'all but extinct'.

While employers pay on average 23% of an employee's salary into a final-salary pension, the situation facing those in money purchase, or defined contribution, schemes where income in retirement is linked to stock markets is another story, where many employers contribute just 6% to 7%.

 

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Research earlier this week highlighted the plight of those in workplace schemes, retiring today, as the average pension pot has collapsed by a staggering 60%, and pension income by more than 70%, over the last decade.

According to financial data provider Moneyfacts, an individual who had paid £100 gross per month into a balanced managed fund for the preceding 20 years would have built up a pension fund of £40,749 if they retired now, compared with £103,914 if they had retired a decade ago. And combined with falling annuity rates this smaller pot delivers a total retirement income of just £2,452, compared to the potential £8,998 10 years ago.

The PPI estimates, the amount of workers that will be saving for their retirement through a defined contribution pension will have tripled to 15m by 2030.

However it added that reforms to the state pension, including plans to increase it each annually in tandem with average earnings, should mean more workers will benefit from a better income from the state in retirement. In addition, the introduction of auto-enrolment into workplace schemes would bolster the amount of individuals with a company pension to around 60%.

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