Pensioners are still set to see a 50% fall in income when they retire despite proposals in last week's pensions reform white paper to improve future pension saving, claims Fidelity International.
Following the publication of the white paper: 'Security in Retirement' which included a series of proposals, such as a higher basic state pension through the re-linking to earnings and a raise in the state pension age, Fidelity recalculated the data it had collected for it’s Retirement Indices published last month.
In the original Fidelity Retirement Index published last month, it revealed current saving trends and pension entitlements would see workers retiring on an income which made up just 42% of the salary they were earning before they retired.
For a person earning the average income of £22,900, 42% would work out at £9,618 a year or around £185 a week, lower than someone working 40 hours a week on the minimum wage of £5.05.
However Fidelity, in partnership with Towers Perrin, have calculated a rise in retirement age to 68 by 2044 and a restored earnings link will improve people’s retirement income, but only by about 7% - which still leaves a 51% shortfall.
For a person on the average salary, this will mean their annual income will rise to £11,221, or £215 a week, which is more than the current minimum wage, however when it increases in October to £5.35 an hour, someone who is retiring will still only earn £1 more than someone on the minimum wage.
Fidelity says while the reforms are welcome, they will not have the impact on standards of living which people are expecting, particularly as they will not be happening over night.
Simon Fraser, president of institutional business at Fidelity, says it is important to note the link to earnings will not be put in place until 2012, and will not begin improving the situation for another six years, meanwhile the increased retirement age will take 38 years to come into effect.
He says: "People should not be lulled into a false sense of security by these reforms. On current trends people are still facing a 50% drop in income unless they start saving more now.”
However Fidelity says the introduction of a National Pension Savings Scheme (Npss), if it is done in the right way through auto-enrolment and the right investments, could make a difference to the 12 million workers not saving for retirement.
Research from the Retirement Index highlights the importance of employer contributions, with workers who are saving in pensions where the employer pays nothing, such as a stakeholder, on track for just 35% of their expected final earnings in retirement compared to an average of 51% for those workers who have employer contributions.
As a result, Fidelity points out if a Npss is introduced, because it contains compulsory employer contributions, it could offer all workers the chance to improve their final retirement income up to around the current average of 50% of final earnings.
Fraser says there is no doubt access to better retirement benefits through the workplace is critical to putting the nation back on track to a healthy pension future. But he warns the key to a successful Npss will be ensuring the default fund is a good once as this will be the route most people will choose.
He adds: “Correct asset allocation and investment strategy can make a huge difference to the size of an individual’s pension pot, and they are more important aspects to focus on than squeezing the total expenses of the fund to 0.3%.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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