UK pensioners receive smallest proportion of working income in developed world, says new study

As the population ages, state intervention is failing to keep pace

Worse off: Pensioners in the UK receive just 29% of the average working income through state systems (PA)

The UK’s retirees are facing the greatest drop in income when they stop work compared with pensioners in other developed countries, research from an influential think tank has revealed, as it warns that further reforms are needed around the world to cope with the financial consequences of ageing populations.

The Organisation for Economic Co-operation and Development (OECD), an intergovernmental economic organisation, has revealed that British pensioners receive only 29 per cent of the average working wage from state schemes once they retire.

That’s less than half the 63 per cent typical proportion received in other member states, which include Mexico, Latvia, and Korea as well as the USA, Australia, New Zealand and the Nordic countries.

In Turkey, retirees receive an average of 102 per cent of the typical working wage once they stop work.

The calculations, designed to compare pensions systems around the world, are based on the mandatory components of pension savings in each country, in other words the state pension arrangements.

The OECD concludes that Britons must be offered strong incentives to save more, with private pensions, particularly in light of automatic enrolment well placed to fill the gap. Meanwhile, pension freedoms are now pushing more savers to take responsibility for managing the effect of longevity on their finances.

“Pension systems around the world are shaped by a combination of social, economic and political factors,” says Tom Selby, senior analyst at AJ Bell. “Some place a greater emphasis on collective provision, while others – including the UK – have a strong private pillar to supplement state income.

'Transformational'

“This report emphasises the importance of maintaining incentives to save and ensuring people have confidence that the rug won’t be pulled from under their feet by politicians prioritising short-term cash generation over long-term policymaking.

“Countries such as Sweden have managed to build cross-party co-operation into their political system to encourage stability – a similar deal in the UK could be transformational and encourage more people to save earlier for retirement.

The flexibility of the pension freedoms has clearly made retirement saving more attractive – a huge positive of the reforms. But Selby warns of the dangers of people withdrawing too much too soon and ending up falling back on the state.

“In strained economic times and with longevity continuing to rise globally, Governments everywhere will have difficult decisions to make about the balance between state and private pension provision. In the absence of a Jeremy Corbyn administration, it’s hard to imagine the UK reverting back to paternalism any time soon.”

All in your head

Meanwhile, experts agree that one of the biggest barriers to private pension saving is that few people understand how much they need to save for a comfortable retirement.

Number crunching from Hargreaves Lansdown suggests that an average annual food bill of £2800 alone would require pension savings of £86,000 to pay for groceries for the typical person’s entire retirement.

Travel, leisure and hotels, with an annual cost of around £2,200 would need a total saving of £66,000 and gas and electricity – at an average annual cost of £1,250, would demand £40,000 in retirement savings simply to cover these costs for the duration of retirement.

“Retirement is extremely personal and everyone has different needs and requirements for spending their pension savings in the years after work. Many people will have exciting plans of how to occupy the extra time they have, so often household spending will be higher in the first few years after work,” says Nathan Long, senior pension analyst for Hargreaves Lansdown.

“Many costs such as food, electricity and gas bills will constantly be around in retirement and will increase alongside inflation, so guaranteeing they can be paid both now and in the future can provide valuable peace of mind.

“Buying an annuity with your pension guarantees an income for life, but it can be done in instalments. The highest income is obtained by shopping around for the best deal especially as around two thirds of people can get improved rates due to their health.”

With funds saved up over a lifetime of working, Brits have a range of options when it comes to turning that savings pot into a retirement income, in addition to the state pension. These include:

Income drawdown - this allows you to keep your pension invested with the option of taking unlimited withdrawals, until the money runs out. The income provided is not secure. You could receive an increasing income in retirement if investments perform well and you don’t draw out too much income every year. However, you could run out of money if you withdraw too much, investments perform poorly or you live longer than expected.

Buying an annuity - where you exchange the money in your pension for a guaranteed income for life. The income is provided by insurance companies and specialist annuity providers. You can also provide some protection for your family in the event of your death.

A mix of annuity and income drawdown - this is often overlooked, but can give an appropriate blend of flexibility and security for example when looking to guarantee that the retirement spending essentials are covered.

Source: Hargreaves Lansdown.