Many Brits who have worked hard all their lives will receive less than the minimum wage in pension payments when they retire. According to the third annual Fidelity Retirement Index, a typical UK worker will be given just £215 per week to live on.
This is just half of national average earnings – which are approximately £457 per week – and falls below the current minimum wage, according Fidelity. And the 53 per cent income drop takes into account all sources of income, including state pension
benefits and private pensions.
While the index is down compared with last year – a 50 per cent drop was recorded in 2006 – it is slightly up on 2005 when workers faced a 58 per cent drop in income when they retired. However, Fidelity believes conditions may "rapidly deteriorate" as defined contribution (DC) pensions replace defined benefit (DB) schemes.
DB scheme members, whose pensions are commonly related to final salary and length of service, are likely to retire on two-thirds of pay after 40 years of service. But for those in DC schemes, where retirement income
is tied to contribution levels and investment performance, are on course for just 38 per cent, a 62 per cent decline and less than £174 per week for someone on average earnings.
President of the retirement institute at Fidelity International Simon Fraser, said: "There's nothing inherently wrong with defined contribution pensions. In fact, DC is arguably a better solution for today's highly mobile workforce.
"But the move from DB to DC is often accompanied by a review of contribution levels, sometimes to the detriment of employees. It is a shocking thought that, if this is not corrected, we could see the emergence of a generation of private pension paupers."
And UK retirement figures appear even less favourable when compared with those from other countries. While British workers are set to receive 47 per cent of pay when they retire, Germans are likely to get 56 per cent and Americans are on track to receive 58 per cent of salary on retirement.
Simon Fraser says: "While the movement from DB to DC schemes isn't a uniquely British phenomenon, the maturity and significance of occupational pensions in the UK means that this trend is much more pronounced.
With the Government still also committed to means testing, for example, there is a danger that the 'real' difference may be much greater for future generations of UK retirees than the headline figure suggests."
© Fair Investment