Economic Update: 13th December 2017
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
OECD FORECAST FOR UK PENSIONERS
An OECD (Organisation for Economic Co-operation and Development) report this week looking at retirees’ income levels should be a wake-up call for everyone. The conclusion is that those reliant on state provision will be poorly served in the years ahead. The UK is particularly hard hit when compared to other nations. This makes it all the more important for the UK to raise its game on the world stage.
The chart below, shown in the report, measures the replacement rate of average earnings paid out by way of mandatory pensions across a set of relatively rich nations. For the UK, their estimate is 29% of pre-retirement net earnings. The report does not provide the underlying data so to put this into context we looked at the average wage (excluding bonuses) in the UK.
According to the Office for National Statistics (ONS), the average net amount earned is £20,008 (after tax and other deductions). Therefore, a ratio of 29% implies a pension of £5,803. However, the average weekly state pension is £159.55 per week (£8296 pa) which implies a ratio of 41%. The calculation they use is based on adjusted numbers but whichever way you look at it the outcome is not great for retirees who have not made sufficient private provision.
Net Pension Replacement rates: Average Earner
Source: OECD, November 2017
The report goes on to highlight that even though the amount of public spending on pensions has grown since 2000, the rate is still well short of what is required for pensioners to maintain a comfortable level of income. Furthermore, the OECD expects the pace of spending growth to slow substantially. At the same time, UK citizens are now living longer meaning those wanting to ensure a reasonable pension may have to delay their retirement date or save more.
The OECD said that Britain’s relatively low state pension was to blame for high levels of pensioner poverty. They point out that the UK’s new, single-tier state pension, introduced in 2016, will have an impact, but only after many years. While younger British workers with private pensions should be able to make adequate provision for retirement, those relying on the state pension and about to retire without additional means of support may be left with few options to increase their level of income in retirement.
