Analysis: People retiring in 2016 expect a retirement income of £17,700 a year, new research has shown, but industry experts have questioned how this figure will be maintained as the decline of defined benefit provision accelerates.
While retirement may be viewed as a golden age of plenty in the eyes of today's workers across the UK, the reality of income received during later life will be dictated by the nation’s capacity to save, as DB arrangements close.
People planning to retire over the next 12 months expect to receive an annual income of £17,700, according to an annual survey of 1,000 people conducted by insurer Prudential – a 4 per cent rise on the level recorded by the same survey in 2015.
People's expectations and reality often turn out to be somewhat different
Malcolm McLean, Barnett Waddingham
While income expectations have not been restored to levels recorded prior to the financial crisis – the “class of 2016” pitched £1,000 below their 2008 counterparts – estimates have increased each year for the past three years.
Nearly half (46 per cent) of survey respondents were members of a final salary DB scheme, while slightly more than one in 10 (11 per cent) had been saving into a defined contribution scheme.
Meeting expectations
Hugh Nolan, chief actuary at consultancy JLT Employee Benefits, said an income of £17,700 delivered the two-thirds replacement ratio required by workers on the UK’s average £26,500 salary.
However, the income expectations of future retirees could be met with a much harsher reality in an environment of declining DB arrangements, Nolan said.
Modelling conducted by JLT shows workers earning £26,500 who auto-enrol at age 25 and contribute the statutory minimum can expect to generate just under half (49 per cent) of their salary as a replacement income in retirement, inclusive of state benefits.
On the same basis, average earners who delay enrolling in a pension scheme until they are 50 will only reach a third of their income – around £9,000 a year on a replacement basis.
“If you have been on a DB scheme through your career you’d expect to get at least 50 per cent of your salary plus the state pension,” said Nolan.
“There are no easy answers [in DC]; whatever you put in you’re going to get out – put in more for longer.”
UK v the world
According to data from the OECD, those earning the average wage in the UK will achieve a 29.7 replacement rate in retirement, lagging behind the US at 35.2 per cent, and a stark gap from Italy with 69.5 per cent.
Malcolm McLean, senior consultant at Barnett Waddingham, said many people “close their eyes to the reality of what they might get”.
“People's expectations and reality often turn out to be somewhat different,” he said.
Vince Smith-Hughes, head of business development at Prudential, said the UK is moving away from a reliance on the state and the employer to provide income in retirement, and into an age of individual responsibility.
“Auto-enrolment is going to really help that, but it does mean people need to take more responsibility for their saving over and above the minimum levels.”
