UK workers face retirement income squeeze

May 02 2007 by Nic Paton Print This Article

British workers are continuing to sleepwalk into a poverty-struck retirement, with most likely to see their incomes slashed in half when they stop work.

The stark warning has come from fund management firm Fidelity, which has warned that, unless current trends change, most workers are saving nowhere near enough to be able to live in the comfort they have become accustomed to when they retire.

Its retirement index poll of more than 1,000 people has suggested that private and state pensions will for most workers replace just half of their expected final salary.

In other words, it calculated, someone earning the average UK weekly wage, of £447 would see their retirement income dropping to just over £223 per week, before tax.

Even assuming the need for lower outgoings, the figure was little more than the current UK national minimum wage of £214 a week for workers aged 22 or over, said Fidelity.

Such a sharp drop in income will not be uncommon, and it may just be the thin edge of the wedge, it has predicted.

Some five million households will face a 58% drop in income at retirement, it forecast.

The biggest divide will remain between workers able to benefit from more lucrative final salary, defined benefit pension schemes and those who have defined contribution pension plans.

While the former was on course to replace 85 per cent of their expected final earnings, far above the ideal two-thirds level, the latter group was on track for just 43 per cent of final earnings, said Fidelity.

Members of defined contribution plans faced, on average, a 57 per cent cut in income at retirement.

Worryingly, seven out of 10 people in defined contribution schemes had no idea how much was saved in it, it added.

And nearly a tenth even had no idea whether their work pension was final salary or defined contribution, despite the fact it clearly made a huge difference to final retirement income, it said.

Simon Fraser, president of institutional business at Fidelity International, said: "It is encouraging that some people appear to be heeding the call for the need to save more for retirement with this year's index showing a year-on-year improvement in readiness of nearly 10 per cent.

"But there is clearly no call for celebration. The pension savings and state benefits of the average family still fall well short of the recommended income replacement rate of 66 per cent.

"It seems the UK working population also has unrealistic expectations of when they want to retire Ė the desired age currently stands at 62," he added.