The future for your retirement income isn’t looking good if you’re considering retiring in the next few months or so. Many experts are suggesting a that a 3 pronged attack on pensions will have the effect of drastically cutting retirement income. The effect of falling pension annuity rates, volatile stockmarkets around the world and pension contributions being frozen or falling has created many problems for retirement incomes – which means that anyone still working now could get a significantly smaller retirement income when they come to retire.
Falling income from pension annuities means that an individual with a £200,000 pension fund retiring at 65 would get an income from a pension annuity of about £5,800 each and every year – in 2009 it would have been closer to (a hefty) £7,000, quite a difference, I’m sure you’ll agree. Mercer says that to retire on the same retirement income someone was projected to receive back in 2009 (only 2 years ago) might now mean working for an extra three years or more today.
As well as pension annuity rates, employees are paying in lower contributions to their pensions and employers have left their contributions unchanged since 2009. For the average money purchase (or defined contribution) pension scheme – the sort of pension most people working in the private sector have – employees now pay in around 4.2% of their salary, down from about 4.6% back in 2009 and employers’ contributions are still at 7.2%.
It is likely that employer contributions into pension schemes will actually rise over the longer term as employers start to recognise that lowering pension contributions to defined contribution (money purchase) pension schemes will change the workforce profile as a result of older employees having to keep working that much longer. Equally, employee pressure to increase pension contributions is likely to have an impact on future employer contributions.
In a perfect world, we would all be paying more into pensions. They are tax efficient savings and they help you to build what could be a larger pension fund at retirement. With that larger pension fund there is more to buy a retirement income with, and that’s really what it is all about. Naturally, a bigger pension fund means a higher income.