Save early, give more and retire a lot later...
If you didn't believe that pensions were in crisis you may do now. According to research from the advice firm Liberty SIPP and The Independent on Sunday, the average worker is facing a bleak old age, surviving on a private or company pension equivalent to only one-seventh of the national minimum wage.
The survey, based on current rates of investment return and at today's prices, shows that to buy an income equivalent to the national minimum wage – just £12,115 per year – Britons have to save up a pension pot of £220,776. However, that is more than seven times the current average pension pot that Britons get together.
"It's widely known that many pensioners are on the breadline, but when you think that the typical retirement income will be just one-seventh of the minimum wage, it relays the true extent of the problem we're dealing with," John Fox, managing director of Liberty SIPP, said.
And what's more, with record government borrowing and all-time low interest rates, the amount of retirement income a pension pot can buy is declining all the time. For example, a pension pot of £100,000 could have bought an income of around £7,000 a year in 2004, but will now provide less than £5,000.
Tom McPhail, head of research at the advice firm Hargreaves Lansdown, said: "Typically, people start saving too late, save too little and expect too much. Linking projected post-retirement income to current earnings makes sense, as it helps to plan that transition from work to retirement."
Mr Fox's prescription is that people simply have to start saving earlier, contribute more and/or retire later. He estimates a 40-year-old needs to be contributing a minimum 11% of their salary to earn the minimum wage in retirement; presuming a punchy average annual investment return of 5%, and surrendering the right to take up a 25% lump sum, which very few pension savers do now.