An alarming report from pensions investment company Royal London this week revealed that the average person must save £260,000 over their lifetime to enjoy a basic income in retirement.
Even more unsettling for private renters, this figure increases to £445,000 if retirees never managed to purchase their own home.
Titled, ‘Will we ever summit the pensions mountain?’ the report provides a stark warning to the rising number of British workers priced out of the property market and unlikely ever to purchase a home and pay off a mortgage.
The report considers that a comfortable retirement requires £9,000 a year, which is an income worth two-thirds of the current average £27,000 a year salary.
Royal London predicts that around one in three retirees will continue to rent and as a result, will typically require an additional £6,554 a year to pay private landlords, according to the BBC.
“We are going to need to build a much bigger pot than in the past,”
Helen Morrissey from Royal London said:
“If our retirement pot is going to support us through a longer retirement and in an era of lower interest rates, we are going to need to build a much bigger pot than in the past.
“More worrying still, we can no longer assume that we will be mortgage-free homeowners in retirement. For those unable to get on the property ladder during their working life, a large private rental bill needs to be factored into retirement planning.”
Why do we need such a large pension pot?
The average pension pot needed to live comfortably has increased by a staggering £110,000 since 2002, when it was much lower, at £150,000 according to the figures from Royal London.
Their report assumes that the average person would receive a full state pension of £8,500 a year, that they will buy an annuity when they retire at 65, and at the same time will have paid off their mortgage.
Lower value annuities impacting pension pots
Along with a higher life expectancy, This is Money explains that one of the reasons for the hike in pension savings required is the decreasing value of annuities.
These allow savers to swap pension pots for a guaranteed retirement income but have been hit hard by low-interest rates in recent years, providing poor value for savers.
In an era of unpredictable and generally low rates, workers are warned that they must increase their savings to, ‘a realistic level,’ to avoid a sharp decline in living standards upon retirement.
Speaking to the Guardian, Steve Webb, Director of Policy at Royal London notes that the data on overall pensions is patchy but claims the average sum saved into pension pots during a lifetime is just around £30,000 to £40,000, which presents a huge shortfall.
“The pension mountain has grown by about 75% in real terms since 2002/03,”
“This is partly because we are living longer and partly because interest rates are much lower, so a given pension pot generates a smaller income.”