Over the last two years, the projected annual retirement income for a 60 year old has decreased by over £3000, while 65 year olds can expect to live on barely half the amount suggested as an acceptable living standard, according to data from Aon Consulting.
Aon also highlights that with life expectancy at age 65 expected to increase by almost exactly one year between 2010 and 2016, a proposed one-year increase in retirement age would still leave retirees receiving their state pension for the same number of years as they do currently.
The impact of the economic downturn and subsequent hit on projected annual retirement income may mean that the UK population will have to work for longer simply to afford to retire at an acceptable standard of living. The Aon DC Index follows the projected retirement income of individuals at different ages who contribute 10% of a £25,000 salary to a defined contribution (DC) pension arrangement and have an existing fund (valued as at September 2007) of £15,000 for age 30 and £150,000 for ages 55 and above.
Despite improvements in stock market performance since the credit crisis, the value of DC pensions is still very volatile and UK pension pots have lost significant value since the recession struck. Aon’s DC Index demonstrates the shortfall that exists, particularly amongst older generations, between their projected retirement income and the estimated £14,400 minimum income a single person needs for an acceptable standard of living .
Retirement income projections
Based on data collected on 30th June 2010 compared to 30th June 2009 and 30th June 2008, the projected annual retirement income of typical DC pension investors at different ages over the two year period is as follows:
30 year old: £19,863 – down from £20,658 in 2009 and £23,060 in 2008 (£3197 decrease overall)
60 year old: £10,824 – down from £10,373 in 2009 and £13,932 in 2008 (£3108 decrease overall)
65 year old: £7,925 – down from £7,512 in 2009 and £10,327 in 2008 (£2402 decrease overall)
Richard Strachan, senior consultant at Aon Consulting, commented: “During the credit crisis, we have seen dramatic volatility in the stock market. Recently the market has showed distinct signs of recovery; however, this is not yet reflected in annual retirement income which remains considerably lower compared to pre-recession values. Looking at the two year period from June 2008-2010, it really is quite staggering to see how significant the impact has been on the income that a retiree can expect to receive.
“It is becoming increasingly clear that the UK population will need to work longer, supporting government proposals to increase the retirement age. Few seem to have considered that even if this increases by a year to 66, life expectancy is also lengthening and is expected to increase by one year over the same period. You will therefore retire one year later, but your retirement is not actually being shortened.
“Furthermore with increasing life expectancy the cost of purchasing an annuity is also on the rise. It therefore still falls on individuals to ensure that they continue to contribute as much as they can afford if they wish to have a comfortable standard of living in retirement. It is no longer the case that a modest level of contribution will secure a modest level of retirement income”.
