A two-year review by the UK Labour party has concluded that workers should double the amount they save into their occupational pensions schemes.
The Independent Review of Retirement Income (IRRI) suggests that people should be aiming to put away 15% of their lifetime earnings, which is quite a bit higher than previously suggested; the rise represents an increase of nearly three times the present average.
The report followed a two-year study and was used by the political party as a warning to highlight the level of saving required in order to avoid ‘future pension poverty’. A hefty 595-page tome, the report written by the IRRI states that it wasn’t so many generations ago that “one worked until one dropped”. The report landed just hours after the UK government launched an official review of the state pension age.
Experts now believe that people joining the workforce today will have to wait until they are around 75 to get a state pension payout.
“To get a decent-sized pension pot for retirement, it is necessary to make adequate pension contributions – something of the order of 15% of pensionable salary,” wrote Professor David Blake, director of the Pensions Institute at Cass Business School, in the IRRI report.
It is telling that industry experts have agreed with Blake’s recommendation and the contents of the report will also be a stark reminder for those trying to achieve the perfect work-life balance that having to work harder for longer than we may prefer is likely to be a reality.
Richard Parkin, head of retirement at Fidelity International told the BBC he had to agree with the IRRI’s findings. “I think 15% is spot-on, unfortunately,” he said in a recent interview. ”It’s a rule of thumb we would recognise, although it represents a challenge for those on low earnings.”
Experts believe that many UK workers will have to work into their 80s in order to maintain their current living standards. For example, if an average earner starts saving for a pension at the age of 22 by making the minimum statutory contributions, he or she would have to continue working until the age of 77 to get a ‘gold standard’ pension.
A ‘gold standard’ pension is otherwise known as a total pension; it includes the state pension and equates to around two-thirds of a worker’s final income before they retire. The next step down is a ‘silver standard’ pension, which equates to just half of pre-retirement income, but in our example above, the worker would still have to work until the age of 71 to achieve that.
The UK government has confirmed there will be a review of the state pension age which will determine what the state retirement age should be from April 2028 onwards. The results are expected to be published in May 2017.
One thing is clear – workers in the UK will have to work longer and harder if they are to achieve the same living standards they enjoy now. With voters having to wait until 2020 to elect the next Prime Minister, the next few years may see the state pension as a key battleground for the two key political parties, particularly on a subject as emotive as this one.