As a finance journalist I’m used to writing about large sums of money, with trillions going unmentioned and billions barely raising an eyebrow. In retrospect it can feel as though the enormity of these figures becomes impossible to grasp.
So I was somewhat surprised to find myself so shocked by a six figure sum: a figure that in comparison to those I usually deal with was actually tiny, but when viewed in perspective was enormous.
That figure – £152,000 – is the amount a man reaching state retirement age this year will need in his pension in order to by an annuity paying out a grand total of £5000 a year.
According to the Office for National Statistics (ONS), households headed up by someone aged between 50 and 64 and approaching retirement had median savings of £195,600 in 2008/10, of which £135,200 was in a private pension. This would produce an annual income of just £4,421 – not too far off Iain Duncan Smith’s £53 a week challenge.
Meanwhile, those hoping to achieve a larger retirement income have also seen big rises in the amount they need to have saved during their working life. To buy an inflation-linked retirement income of £25,000, which is still less than the UK’s average salary, now takes a pension fund of £763,900. In December 2009 a man aged 65 needed to have saved £590,200 to achieve this, while a woman of the same age needed to have put by £667,700.
The ONS figures reveal the savings needed have increased by 29% over the last three years, but while the extent of the increases are alarming, what really worries me is how ridiculously far removed these end results are from what most people think they will need – or achieve to earn themselves a comfortable retirement.
According to one survey conducted last year by HSBC, people under 24 believed they could happily retire with a pension pot of less than £50,000, while those over 45 were a tad more realistic with an aim to save about £100,000.
While the introduction of auto-enrolment and schemes such as the National Employment Savings Trust will ensure far more people will save for a pension than before, there is still a real concern that they will assume that putting aside the minimum amount each month will see them retire in comfort.
Perhaps we need to shift from talking about pension pots in terms of lump sums and insist on discussing what they will actually provide as an income each year. Otherwise, as these figures worryingly illustrate, many people will be in for a very rude awakening.
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