British pre-retirees are in even worse shape than their American counterparts when it comes to saving enough for retirement. According to new research from J.P. Morgan Asset Management, British retirees are counting on state benefits and part-time work to fund their retirement, and almost half of pre-retirees admit they currently save nothing for retirement, despite two-thirds expecting to rely on a pension for income.
When asked what their expected sources of income will be, 64% said they expect to use a pension for income in retirement, while almost half (47%) will use state benefits (up from 29% in 2006), and a quarter say they will work part-time. Only one in five (21%) expect to use other investments as a source of income in retirement (down from 41% in 2006), while others will rely on inheritance or downsizing their home (14% apiece) and one in 20 (5%) will depend on equity release.
The research found 71% of men expect to use a pension as their income compared with 58% of women, with a higher percentage of females relying on their spouse/partner to support them (22% compared with 15% of males).
When asked how much of their income they are currently saving toward a pension, the nation's average is just 3%. At the extreme ends of the spectrum, half of pre-retirees surveyed say they are saving nothing at all for their retirement (52% of women and 39% of men), while 6% of those polled save more than one-tenth of their income.
Furthermore, when asked what level of pension income they expect to receive in retirement, more than half (53%) say less than 40% of their final pre-retirement salary. The average pension income people are expecting to receive is 37% (on the national average salary of £26,500 this would be £9,805 a year in today's money). Overall, the expectation is higher among males than females – men believe they will receive 40% of their final salary as a retirement income compared with one-third of final salary (34%) for women.
"If ever the nation needed a wake-up call to start planning and saving for their long-term financial future and retirement then this is it. Worryingly, every second person is saving absolutely nothing for their retirement, yet on average people are expecting to retire on 37% of their final pre-retirement salary. Sadly, the numbers just don't add up," said Keith Evins, head of UK Funds Marketing at J.P. Morgan Asset Management.
Respondents were also asked what size pension fund they would need to generate a pension income of £25,000 a year, and awareness is low. Sixty-three percent of UK adults admit they don't know. That percentage is even higher among those over the age of 55. On average people believe that to generate an income of £25,000 per annum they need £380,061. This sum is higher among those who are 55 or older, with a mean answer of £476,550, compared with £289,216 for those who are aged 18-34. At current annuity rates, as of March 11, 2013, a 65-year-old with no health problems would need a fund of around half a million pounds to secure an annuity of £25,000.
"The situation is a worrying one, but people should not necessarily panic. My advice is to take a step back from the situation and start saving for the long term,” said Evins. “There are many points in favor of using pensions as a primary retirement savings vehicle. No other type of investment is likely to offer the prospect of generous contributions from one's employer, for a start. But the biggest point in pensions' favor is undoubtedly the tax relief that is currently available, which means for a basic-rate taxpayer a £100 contribution only costs the saver £80, or £60 for a higher-rate taxpayer. However, although pensions will usually be the beginning of retirement planning, they should not necessarily be the end of it – which is where [individual savings accounts] come in."
This article was originally posted at BenefitsPro.com, a sister site of Credit Union Times.