Chartered Insurance Institute has looked at cost of living post-work and found that average incomes achieved by retirees are insufficient
Average pensioners only achieve 30% of their pre-retirement salary as income. Photograph: Kathy deWitt/Alamy
UK savers face a retirement savings gap of £9tn due to increasing levels of debt, the cost of long-term care and insufficient pension savings.
The Chartered Insurance Insitute (CII) has used existing data produced by the OECD to calculate the shortfall in savings needed to cover the cost of living in old age. It shows that on average pensioners only achieve 30% of their pre-retirement salary as income during retirement, significantly less than the 70% the OECD believes is necessary to live adequately.
This assumption does not factor in the cost of long-term care and paying back of debt, so the CII has tried to show the difference between what people are actually saving and what they need to save to live comfortably and cover these additional costs.
David Thomson, director of policy and public affairs at the CII, said: “We ran two core scenarios: the first assumed that pensioners retiring over the next 40 years achieve the current average retirement income, all have debts to pay down, and one in four need long-term care. In this situation, the total UK retirement savings gap is £9tn – more than the US 10-year budget deficit projection.
“The second scenario assumed that pensioners retiring over the next 40 years achieve 50% of their pre-retirement income and carry no debts into retirement. Again we assumed that one in four required long-term care. In this situation the total UK savings gap was still £4.4tn.”
The first scenario is based on someone with an income of £9,702 a year paying back £50,000 debt, with total living costs of £388,080 spread over 18 years and long-term care costs totalling £104,000 over four years. In these circumstances the average shortfall would be £21,098 a year. If they did not need long-term care the shortfall would be £15,189 a year.
In the second scenario the person has income of £15,400 a year, has no debt to service but four years’ of long-term care to pay for. In this case the deficit would be an average of £12,559 a year, or £6,650 without long-term care.
Thompson said the scale of the problem was “massive”, but said it could be combatted if the government clearly explained to the public that the state will not, and cannot, pick up the bill. “Doing nothing is not an option if the public wants a reasonable retirement income.
“Secondly, the financial services sector should shoulder its responsibility and embrace reforms in legislation aimed at improving the standards of, and levels of trust in, financial products and providers. These reforms must be communicated to the public.”
Thomson added: “Finally, there has to be more cross-party collaboration to provide the public with certainty around future rules. More must be done by both the government and opposition not only to provide solutions but to engage with a sceptical public to build understanding and acceptance of the action required.”
Commenting on the report, pensions minister Steve Webb said: “The next generation will face a different world with increasing life expectancy, the decline in final salary schemes and lower annuity rates. They are going to have to take greater responsibility for saving for their retirement.”
Monday 9 May 2011 11.51 BST
Source: The Guardian