State pension versus retirement income needs

The Department for Work and Pensions’ target replacement rate (income in retirement as a proportion of income in work) for a median earner - someone earning between £22,700 (around £436 a week) and £32,500 (£625 a week) - is 67 per cent.

To put this into context, JLT Employee Benefits’ head of technical John Wilson says that for those already in receipt the median income from state pension, it equates to £155 a week.

The new single tier state pension, for those reaching state pension age after 5 April 2016 with a full entitlement, will be around £151.25 per week (in 2015 to 2016 terms).

Even by topping up the state pension with the maximum contribution, Steven Cameron, regulatory strategy director at Aegon, says people should not expect to live the high life on the state pension alone.

“The state pension will provide a significant percentage of many people’s retirement incomes, but the more money you can put away through private pensions, Isas or other forms of savings, the more likely you are live comfortably in retirement,” commented Mr Cameron.

Malcolm McLean, senior consultant at Barnett Waddingham, says whether topping up will sustain you through retirement really depends on your lifestyle and the level of income you believe is necessary to sustain that lifestyle.

For most people, he says that the state pension alone, even when topped up or enhanced to the maximum extent by the methods described above, will not in itself provide much of a cushion above the minimum income threshold specified by the government for pension credit.

It is only those existing pensioners who have had the foresight (or good fortune) to have provided for themselves through private pension saving that will be reaping the rewards at this stage of their lives.

And although much has been made of the new single-tier state pension, which comes in for new pensioners from 6 April 2016, Mr McLean says it excludes existing pensioners and will not at the starting level proposed make that much of a difference to the income levels of future generations.

“Class 3A was probably created as a concession to today’s pensioners many of whom had expressed deep dissatisfaction about missing out on the new scheme.

“For their sake, we can but hope that a future government finds it possible to continue the triple lock beyond 2020 and that the state pension continues to rise at a rate which guarantees the majority of the pensioner population a degree of security and well-being in their declining years.”

Ultimately Peter Bradshaw, national accounts director at Selectapension, says people have been gradually saving less and spending more, and this failure to provide for later life will catch up with those retiring in 2035. “Consumers need to start saving more and earlier in their working lives,” he added.

David Trenner, technical director at Intelligent Pensions, says relying on the state for adequate retirement income is a sure fire trip to ‘disappointment street’.

He noted: “The onus now is firmly on the individual both in terms of saving enough and spending those savings wisely – a challenge the majority are still failing to come to terms with.”