State benefits and a pension annuity at retirement
There are some new figures from the Government revealing just how much Britons need to save to avoid retiring on means-tested state benefits…and it makes for a daunting read. The Department for Work and Pensions (DWP) admits that low earners will see their retirement income increase by only 1 per cent of their salary, or £2 a week, after 10 years’ saving in the Government’s flagship new pension scheme to be launched in 2012. This as a result of means testing pension income. Not a particularly good return!
These figures highlight the way Pension Credit, the means-tested benefit paid to pensioners with small pensions, reduces the incentive for many people to save. Indeed, some research suggests that the average UK saver needs to build up a pension pot of £43,789 to avoid retiring on benefits at age 65. This pension pot then being used to buy a pension annuity for the individual’s retirement income. Interestingly, the average pension pot in the UK today is below this figure, nearer £35,000.
Some say this is a hangover of offering Pension Credit to today’s pensioners, which has helped millions of elderly people, but has also had an effect on the incentive for many to save.
Many people will fall on benefits as they get older because while basic state pension rises each year in line with prices, and most pension annuities have no inflation protection at all, the threshold for benefits goes up in line with wage inflation, which increases at a higher rate.
Non-means tested state pension comes in two parts. Basic state pension, currently £90.70, and state second pension, which varies in amount depending on earnings over your working life. The average combined basic and state second pension is currently £134 a week.
To understand how the means-testing system will affect your pension saving, you need to know how much state pension you are likely to get. You can do this by contacting the Pensions Service by telephone or by visiting their website in the first instance.