Savers on average earnings will need to build a pension pot of more than £300,000 typically to maintain their current lifestyle in their retirement, according to research from Aegon.
The provider’s findings are based on figures published by the government in the auto-enrolment review announced in December, which highlighted that those on average earnings of £27,000, should be targeting an income equivalent to two thirds of their working age income - £18,000 a year or £1,500 a month.
This means an average earner entitled to the full state pension of £691 a month would need another £809 a month from private and workplace pensions to meet the target.
Aegon’s analysis of current annuity rates found that at age 65, an individual in good health would need a pension fund of £301,500 to buy a guaranteed income for life of £808 per month, increasing with inflation, which would fill in the gap.
Percentage to maintain lifestyle
Target retirement income
Monthly income needed on top of full state pension
Amount needed to buy this at age 65
According to the provider’s calculations, the equivalent retirement pot required for those on earnings of £13,000 and £56,000 is £65,300 and £612,700 respectively, reflecting the different percentages required to maintain working age lifestyle.
Steven Cameron, pensions director at Aegon, said that the auto-enrolment review “identified that there are 12m people under saving”.
“It’s perhaps not surprising that people are under saving when you see how much generating an annual income of £18,000 costs,” he added.
Mr Cameron explained that the amount is so high because life expectancies have grown significantly in recent decades and long term interest rates, on which annuities are based, are currently very low.
He said: “All these figures assume that people will be able to top up their income with the full state pension of £8,300 per year, but it’s important to check what you’re actually due as many people will receive less.”
The Department for Work and Pensions (DWP) announced at the end of 2017 that is making changes to the age for auto-enrolment of workers into workplace pension schemes from 22 to 18-years-old, and changing the way pension contributions are calculated.
Currently the auto-enrolment minimum total contribution is 2 per cent - 1 per cent each from the employee and employer.
From April 2018, the minimum total contribution will increase to 5 per cent, with the employee paying 3 per cent.
One year later, it will increase again to 8 per cent, with the worker paying 5 per cent.
Mr Cameron argued that wile auto-enrolment is helping plug the pension gap for employees, many “face a shortfall which won’t go away on its own”.
He said: “The earlier you take steps to put a bit more aside, the better, and a good New Year’s Resolution would be to ask your employer if they’d be prepared to match any increase you make with an increased employer contribution.”
Mr Cameron added that until recently, “many people planned their retirement around when their state pension would start and used their retirement fund at that age to buy a regular income for life”.