Thousands of pensioners will be living below the poverty line thanks to an inadequate state pension. Failure to save in a personal or work pension will leave thousands with less than £8,600 a year – the income considered the necessary to reach a minimum socially acceptable standard of living.
Women are three times more likely to rely solely on the state pension in retirement, thanks to fragmented working history and lower average wages. According to the annual Prudential ‘Class of’ retirement report nearly one in five people retiring this year will be left with an income of less than £8,600. The highest percentage of pensioners retiring with an income below this threshold was in the South West of England.
The report also reveals a fifth of women and 7% of men retiring this year have no pension savings at all and will be solely reliant on the state pension.
“Relying on the state pension is an uncomfortable position to be in, and individuals must make all efforts to ensure they don’t end up in this situation,” urged Laith Khalaf, head of research at Hargreaves Lansdown.
“Women in particular tend to have low private savings because they take career breaks to have children and those retiring today may have expected to rely on their spouse’s pension. But even stay at home mums have a £3,600 annual pension allowance they can use to save for retirement, and get tax relief form the government into the bargain, even if they pay no tax.”
While the results for those retiring this year are disappointing, future pensioners should be dragged out of poverty thanks to government initiatives such as auto-enrolment and the recent plans to scrap annuities.
“The introduction of auto-enrolment into workplace pension schemes is helping to encourage saving, and along with plans for a flat rate state pension from 2016, small steps are being taken to improve retirees’ prospects,” said Prudential’s retirement income expert Vince Smith-Hughes. “However, simply saving as much as possible as early as possible in your working life and seeking professional financial advice in the run up to retirement will help to make the most of your savings when you’re ready to stop working.”
Member engagement is key to the success of auto-enrolment and the Chancellor George Osborne’s plans to scrap compulsory annuity purchasing announced in last month’s Budget should encourage workers to prioritise their retirement plans.
Last year more than 350,000 annuities were sold by Association of British Insurance members in the UK and analysts predict this market will now drop by two thirds over the next 18 months.
“The good news is pensions are likely to become much more popular because from next April you will be able to draw your pension as and when you want it, once you hit 55 years of age,” said Khalaf. “This is a big step change, and combined with a £15,000 Isa limit means there really is very little excuse to hit retirement without two pennies to rub together.”
