Live long, die poor

Oct 11 2002 by Brian Amble Print This Article

The latst warning about the UK's ticking 'pensions timebomb' has been issued by new research by economists at PricewaterhouseCoopers.

Unless savings rates or retirement ages increase significantly, they say, the current generation of young people may be destined to live longer than earlier generations, but many may die in relative poverty. And the picture for women who take time out to have children is particularly bleak.

The report projects combined private and state pension entitlements for a range of hypothetical case studies of men and women born in 1980 and due to receive their state pension in 2045. The analysis is based on plausible assumptions about income profiles, contribution rates by age, net asset returns, annuity rates and the state pension regime.

The projections indicate that even if a man has an unbroken 45 year work record at UK average levels of earnings and pension contribution rates, he is likely to retire at 65 on a private pension of only around 30 per cent of his final salary.

The basic state pension would only top this up to around 37 per cent of UK average earnings and he would almost immediately become reliant in part on means-tested increments from the pension credit. Furthermore, as he gets older, he would face a steady decline in his relative income to around a third of UK average earnings by 85 (an age that around half of his generation are expected to reach) and only around 30 per cent by 95 (an age that an increasing number of people are expected to reach in the latter half of this century).

The situation is even worse for women who take a break from their careers to look after children. They face a 'triple whammy' from lost earnings (and so pension contributions) during career breaks, a probable lower income level on return to work, and a lower annuity rate on retirement.

For a woman initially on average earnings in her twenties, her private pension on retirement might be only around 60 per cent of that of a male counterpart with the same initial earnings but an unbroken career record thereafter. The pension credit will provide some help in bridging this gender gap provided that women take up their full entitlements, but also has some drawbacks in reducing incentives to save for those on moderate incomes.

There are only two ways to resolve these issues: work longer or save more (or both).

For a man on average earnings throughout his career, retiring at 70 could boost his total pension income at that age by more than a third on the PricewaterhouseCoopers estimates. In contrast, early retirement is shown to come with a high price tag. In the case of a high earner who wants to retire at 55, his pension by 65 is likely to be less than half of that if had he continued working for another ten years.

John Hawksworth, Head of Macroeconomics at PricewaterhouseCoopers and author of the report, commented that:

"Aside from working longer, the only other way for young people to build up an adequate pension is to save more, but our calculations suggest that the gap to be filled is a large one.

"For a man on average earnings with an unbroken career record, our projections suggest that pension contributions would need to double from current UK average levels in order to deliver a total pension (including the state pension) of two-thirds of final salary at 65. This is a tough target to meet at a time when employers are reducing their contributions and low asset returns make people reluctant to save more. But these are precisely the factors that mean that such additional saving is now more necessary than ever."

PricewaterhouseCoopers ( is the world's largest professional services organisation.

For further information, please contact
John Hawksworth, Head of Macroeconomics Unit, PWC, on 020 7213 1650 or Michael Cracknell, Tel: 020 7213 1768

The full report is available by emailing: [email protected].