Babies born today need to have started saving 30 years ago if they are to retire with an annual income equivalent to half the average UK salary of £27,000, according to calculations by pension provider, Liberty SIPP.
To secure an annual income of £13,500 at the age of 65 – after taking the 25 per cent tax-free lump sum – currently requires a pension pot of £250,000. A person saving at the “average rate” – that is, only making the contributions required to generate the average UK pension pot size of £30,000 by the age of 65 – would need to save for 95 years to reach the £250,000 mark.
This means that a baby born in 2014 would need to have started making pension contributions in 1984 – the year of the Miners’ Strike and Band Aid – to be able to retire on half the current average wage.
To reach the same pension level without taking the tax-free lump sum requires a pension pot of £188,000, which people born today, if saving at the average rate, would only achieve if they had started saving in 1991 – the year of the first Gulf War and the collapse of the Soviet Union.
John Fox, managing director, Liberty SIPP, said: “I’m sure the pensions industry is starting to sound like a broken record, but people are saving way too little and are starting way too late. Either we do something about this or we invent a time capsule so that a baby born in 2014 can start saving for their pension in the mid-80s in order to get a half-decent retirement in 65 years’ time.
“Such concerns are unlikely to trouble Prince George when he celebrates his first birthday this month. But his contemporaries – who are only able to save for their retirement at the average rate – are already 29 years late in starting if they want to retire with a pension worth half the average Briton’s income.
“Princes seldom have to worry about their pension plans, but for everyone else this is a real and pressing issue.”
Liberty SIPP said that a 21-year-old wanting to build up a £250,000 pension pot and receive half the average salary when they turned 65 (after the tax-free lump sum) would need to start contributing £1,734 per year – or 8.3 times more than the current average rate of saving.
To achieve the same retirement income without the tax-free lump sum (a pension pot of £188,000), they would need to contribute £1,305 per year – or 6.3 times more than they are currently saving.
Using his own calculations, John Lawson, head of policy at pension provider Aviva, said that to get half their salary when they retire, people would need to save at a rate of about 15 per cent of earnings.
“That comes to a total of £112bn across the UK, but we’re only saving £50-60bn, so we’re undersaving by about 50 per cent,” he said.
“But the problem is that the £50-60bn is only being saved by around 55 per cent of the working population. If we’re undersaving by £55bn, auto-enrolment will plug that gap by about £15bn, but we’ll still be well short of the target.
“Auto-enrolment is a good start and will push contributions up to 8 per cent, but we need to save 15 per cent, so I’d like to see the Government increase compulsory contribution levels – by small steps, so that people don’t notice it too much – to perhaps 12 per cent.”
A 2010 study by Aviva found that the UK had the biggest pensions gap in the European Union, and warned that people retiring between 2011 and 2051 in the UK would need to invest an average of more than £10,000 per person, per year.
Mr Lawson said: “Relative to other countries, the UK will have improved since then – we’ll be more towards the middle of the pack – but we still have a long way to go.
“In Sweden, compulsory contributions stand at 18.5 per cent, and voluntary contributions of 4 per cent bring their total pension savings up to 22.5 per cent. That’s a very healthy place to be.”