A report has found that the income of retirees in Britain falls by the greatest proportion compared with pensioners in any other country in the OECD.
A worker in the UK who earns the average wage, and relies solely on the state pension, will see their retirement income drop to just 29 per cent of what they used to earn. This is less than half of the OECD average of 63 per cent.
The OECD, which was founded in 1960, now consists of 35 member countries from a range of continents including Europe, North and South America, and Asia. The OECD includes some of the world’s most developed countries, as well as emerging economies such as Mexico, Chile and Turkey.
According to the report, the UK was ranked the worst in terms of retirement income. Even workers in Mexico had a greater income during retirement as a percentage of their in-work earnings, at 30 per cent. Turkey was ranked first at 102 per cent.
The study used the net replacement rate, which the OECD defines as “the individual net pension entitlement divided by net pre-retirement earnings, taking into account personal income taxes and social security contributions paid by workers and pensioners.”
Even for a worker earning the average wage in the UK, relying on the state pension with a net replacement rate of just 29 per cent, does not even come close to the recommended target replacement rate of about two thirds of your final salary.
According to the Annual Survey of Hours and Earnings (ASHE) 2015, the average gross annual earnings for full-time employees is £27,600. With this salary, the ideal retirement income would be about £18,400 per year.
Those eligible for the maximum old state pension currently receive £122.30 per week or just under £6,360 per year. Those on the maximum new state pension currently receive £159.55 per week or just under £8,300 per year.
Clearly, the state pension is not enough even for the average worker in Britain.
This report highlights the importance of saving into a private pension. The state pension is simply not enough to provide a sufficient income during retirement. In addition, the state pension situation is likely to get even worse as government funds dry up and the retirement age is pushed back further.
The OECD also warns that UK pension freedoms such as flexi-access drawdown and UFPLS could lead to people running out of money during retirement “Individuals may be inclined to spend the lump sum early, or underestimate their life expectancy through the drawdown period, leaving them with limited resources at very old age.”
Defined benefit workplace pension schemes also have the potential to be problematic. According to the study, these pension plans are consistently being underfunded in the UK, as well as in the US, Canada, Mexico and Iceland.