Britain has the largest pensions gap in Europe and people need to put £10,300 a year more on average into their pension pot if they want to keep their current standard of living in retirement, new research claims.
The average pension gap – the difference between the income needed to live a comfortable retirement and the actual income individuals can expect from their current pensions – is also higher than in any other European country, according to the study by insurance giant Aviva and accountancy firm Deloitte.
The research was conducted on the basis that people would need 70% of their income in retirement to meet the same standard of living enjoyed during their professional life.
The erosion of final-salary pension deals and a misunderstanding of the scale of contributions needed to build up pension capital are leaving savers short, it has been claimed, with experts warning that radical action is needed on the pensions crisis.
Dr Ros Altmann, a former adviser to Tony Blair, and director- general of the Saga group where her brief is to champion the over-50s, said: “Just saving more money is not enough. People need to think about continuing to work part-time.
“Having a decent lifestyle for 30 years of retirement isn’t going to happen easily.
“The shortfall is so huge because we have such a low state pension, we are just about the lowest in the developed world.
“The reason it is so low is that for the past 10 years the Government wanted private pensions to fill the gap, and that has just not happened and policy hasn’t adjusted to the new reality.”
Aviva’s pension gap is based on the 31 million UK adults who are due to retire between 2011 and 2051.
The firm uses data issued by both the Organisation of Economic Co-operation and Development and the Department for Work and Pensions.
It is estimated that people aged 50 need to boost their pension savings by an average of £6200 a year, while those in their 40s need to increase it by £3100.
Aviva, which is one of many high-profile companies proposing to end its final-salary pension scheme, called for the Government to reform measures designed to get people saving for the future.
At a European level it wants a European Pensions Target for every country in a bid to instill a culture of personal investment.
Steve Patterson, managing director of Intelligent Pensions, in Glasgow, said he was not surprised by the scale of the gap.
He said: “We know that people’s perceptions on how much a retirement income is going to cost is based on a very poor understanding of what the ratio is between a pension and pension capital.
“Somebody may want an extra £10,000 a year on top of their state pension but people will generally not understand that they will need to save in the region of £200,000.”
Mr Patterson said that could mean monthly contributions of about £600.
He added: “Whatever the figure is, someone is going to have to motivate you to start saving today, not tomorrow, as tomorrow never comes.”
Toby Strauss, Aviva’s UK Life chief executive says: “The issue of retirement funding in the UK has never been more relevant than now.
“People are living longer, staying healthier and have high expectations for their golden years.
“While it has long been said that there is a pensions gap in the UK and beyond, this new study actually puts a figure on the shortfall. The findings are startling, with a UK shortfall of £318 billion annually.
“We know from our research that many people in the UK are planning to work later into life, but this will not solve the issue fully.”
The report said: “Today’s research should act as a wake-up call for individuals and governments across Europe, particularly in the UK.
“Fortunately, it is not too late for people to take action. Aviva believes that effective partnerships between the Government and the private sector are crucial to solving this problem.”
Record number to turn 65 in 2012 as baby boomers age
More than 800,000 people in the UK – a record number – will hit 65 in 2012 as the baby boomer generation comes of state pension age.
Aberdeen will see the biggest rise in the UK of those entering their golden years, with a 33% rise predicted in 2012 when compared to this year.
Edinburgh will see a 25% increase in those reaching the milestone, with a 24% rise due in Aberdeenshire.
The increase has been described as “staggering” by the Department for Work and Pensions, with the country facing a huge challenge given that many of the post-war baby boom generation will start claiming their state pension at the same time.
The Government is proposing to bring forward a rise in the state pension age, with a decision due later this autumn.
Plans are in place to increase it from 65 to 68 between April 2024 and 2046, but these proposals may be accelerated in a bid to reduce the impact of state pension payments on the economy.
Since the first of the baby boomer generation started to draw their pension at age 60 in 2005/06, Government spending on people over working age has risen by more than £14 billion. By 2012 it will have risen by nearly another £4bn.
Pensions Minister Steve Webb said: “People are now living longer, healthier lives and most 65-year-olds can expect to live until their late 80s. State pensions need to reflect this and we need to make sure that the system is sustainable in the face of increasing longevity.
“We also want to make sure that where older workers want to keep working, they don’t find themselves pushed out of the workplace or experience age discrimination.”
At present, the state pension age is 65 for men and 60 for women born before April 5 1950.
Paul Davies of the FT reports, Survey finds €1,900bn hole in EU pensions:
Workers across the European Union need to save €1,900bn ($2,490bn) more each year if they hope to retire with pensions that will maintain their standard of living, according to new insurance industry research.
The so-called “pensions gap” is worst in Germany and the UK, where the total additional savings required each year are €468.8bn and €379bn respectively.
When calculated per head, the situation is worse for UK citizens, who need to save an average €12,300 a year extra, while Germans should put aside an extra €11,600.
The research, which is the first attempt to calculate the savings shortfall across the 27 EU nations in a comparable fashion, is being released as the European Commission nears the end of a long consultation process on its pensions green paper issued in July.
The commissioners who launched the green paper said the recent financial crisis had increased the pressure EU retirement systems were already facing from ageing populations. By 2060, the ratio of pensioners to active workers was set to double, the commissioners said.
Andrea Moneta, chief executive of Aviva Europe – the insurer that drew up the research with consultants Deloitte, Oliver Wyman and The Future Company – said while the headline number would shock, the point of the research was to help show how the gap could be closed.
“There is a lot of discussion of public sector deficits and how much they need to be cut, that is one side of the coin. The other is the consumer and how lower public spending could affect them,” he said. “We want to talk to politicians at all levels because there are a lot of ideas that are possible to pursue.”
Mr Moneta said there should be better information across Europe to help individuals understand exactly what they were likely to get when they retired. He added that Brussels should promote pensions savings targets, as they did with carbon emissions, for example.
The amount people need to save differs sharply by age group so that a 50-year-old German, for example, ought to be saving an extra €9,700 a year, while a 20-year-old only needs to put aside €1,700 more each year in order to achieve 70 per cent of pre-retirement income.
The French, Italians and Spanish also face large pensions gaps but, according to the research, are likely to have a much greater level of financial support from their non-pension assets, such as life assurance, other savings and home equity.
Cashing in all these things would cover 80 per cent of the gap for the French, 85 per cent for Spaniards and 220 per cent for Italians.
I think that this is beginning to be the case in more countries in western civilization. I work in the auto repair financing industry, and I see many clients of retirement age unable to make simple repairs on their vehicles due to inadequate pensions. With capitalism comes greed, and I believe that's what is at the core of this issue.
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Leo - what does this article assume in terms of future state pensions? It sounds like it assumes these state benefits will continue as they are.
State benefits are generous on mainland Europe. But, these benefits are not funded (no real assets backing the state benefits - they are just promises). Assuming that they will continue as they are in 2050/2060 is questionable (at best). Like nearly every state pension system out there - the underlying assumption that governments can always raise taxes to meet the benefit needs of the retirees is wrong. Especially when the workforce is shrinking.
Fact is: our modern day retirement thinking was formed and put into place in the early 1900's. Back then, you had 5 kids, you retired at 65 and you were dead at 70 (if you were lucky). We live in a society where people think they can work for 35/40 years, then spend a good 25+ years in retirement. Those demographics just don't add up. Japan is an unfolding example - lets see what happens there in the next two decades...
right now retirement is a low priority. focus on victory against jihad. that is the priority.
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people think their annuties and whole life will give them livetime income are in for a big wakeup.
WE NEED A NEW WORLD WAR TO DECREASE THE SURPLUS POPULATION!!!!
KILL THE ENGLISH!!!
You are beyond retarded. Indeed, you may have taken 'stupid' into a whole new category ;-)
I realise you were joking, since noone is that terminally dumb. I wouldn't write the English off just yet. Since you hail from Belgium, I believe, you may need us to help you out like we did in the 1940's...
Is it possible to save for retirement. I mean, can a society as a whole, save for retirement. Under what conditions. Has anyone really looked into this. What if everyone saved, how much to save, what would the effect on asset prices be, what happens during draw down. Is it possible for a society to save for retirement?
Sure you can save for retirement.
...Just be very careful what you choose to use to save for retirement in!
Same here. Does that mean that labor costs are going down? Does that mean that unemployment rates will rise? Does that mean we are screwed? Well, I reckon so.
UK is toast, forget pensions, they have to find a way to survive as a nation.
The last few paragraphs are the most interesting, Leo.
So, what public policies have European nations enacted in the last 40 years that would encourage savings rather than consumption?
Great advertising by Aviva ... get people to 'save' more by making greater monthly contributions into their Aviva retirement fund = more in commissions and perpetuate the ponzi.
Our governments are merely puppets and the "elite" are running the show behind the scenes by pulling the strings. Civil unrest is coming and even the old folks will join in!
I believe it!