UK faces £1.2 trillion shortfall in individual retirement income

THE gap between individuals’ expectations and reality of retirement income has increased by 50 per cent since 2004, according to research by Hewitt Associates. Based on data from a survey of 2,000 people over the age of 18 conducted by YouGov, Hewitt has calculated the gap between current behaviour and the likely reality as £1.2 trillion.

The figure is based on current level of contributions to a non-state pension, expected age of retirement and individuals’ prediction of their level of pension income. The equivalent calculation from the 2004 put this at £0.8 trillion, meaning that the gulf between expectation and reality has grown by 50 per cent over the last six years, says Hewitt. On an individual basis, the current reality gap equates to £50,000 per person ofworking age, equivalent to two years of gross salary for a worker on the UK average salary of £25,000.

The survey, conducted in early April 2010, revealed that more than two fifths of workers, 42 per cent, are not members of an employer-sponsored scheme, that 27 per cent of workers are members of a private sector pension scheme, and that 29 per cent are members of a public sector pension scheme. Hewitt says the data reveals what may be the root cause of the expectation gap: a general lack of understanding of
pensions among the UK population. A third of non-retired respondents (31 per cent) do not know what to expect their approximate annual income in retirement to be; and although this decreases with age, almost a fifth (19 per cent) of those aged 55 and above still do not know what to expect.

Lynda Whitney, pension consultant at Hewitt Associates, says: “Saving for retirement is a major issue and one of the largest socio-economic problems to be faced by the new UK government. This saving gap cannot be met through higher state benefits funded by taxing future generations as the proportion of pensioners is increasing relative to the working population. People need to wake up to the fact they will have to save more, work longer and/or live on a lower pension in retirement.

“Over the past six years, individuals’ behaviours towards pensions have not materially changed and are worryingly out of step with the likely reality of retirement for many. Over 40 per cent of the population are relying solely on the state pension and a startling number have wildly optimistic expectations of what this will provide. While Nest, the Government’s proposed system of personal pension accounts, will go some
way to addressing the problem with its automatic enrolment pension saving structure, it will not address the basic issue.”