Mind the retirement gap of £100,000 (or £200,000)
MGM Advantage, the retirement income specialist, has calculated the current retirement funding gap.
By analysing official data, the company has worked out the pension pot required to bridge the gap to provide two-thirds salary, which according to new research1, is the average ideal retirement income.
The gap is £5,954 a year for the average retiree, which would require a pension pot in the region of £100,000 using an annuity, or £200,000 if you want your income to rise with inflation and provide for your spouse. These figures do not include people taking any tax-free cash from their pension, so in reality the pension pot required is likely to be larger.
Average income before retirement £33,288
Aiming for 2/3rds salary in retirement £21,970
Current average income in retirement £16,016
Income gap £5,954
Retirement funding gap £100,000
Andrew Tully, Pensions Technical Director, MGM Advantage commented: ‘These figures show the true scale of the problem facing people approaching retirement. There is a chasm between savings and the ‘ideal’ retirement income, which should serve as a wake-up call for many people.
‘The scale of the challenge becomes even scarier if want your retirement income to keep pace with the cost of living and provide for your spouse. There are options for people who might have left saving for retirement too late, for example you could consider delaying retirement, continue to work part-time, use equity release or even downsize your home.
‘The recent changes brought about by the Budget potentially provide more choice for people looking to generate a retirement income. But you still need a sizable pension pot or other savings to draw on to provide a sustainable income. Seeking professional financial advice can make a big difference to the value of the retirement income you could get.’
The numbers show some wide variations on a regional basis4, with people retiring in the North East and East of England faring better than those in the South East and London.
Tips to a better retirement
From April 2015, you can use your pension savings any way you like. The first 25% can be taken as tax-free cash, and the remainder used as you wish (all income or capital withdrawals subject to your marginal rate of tax at the time)
Consider when you want or need to take your benefits – both state and any private pension. You don’t have to use them at ‘traditional’ retirement ages, or when you stop working
If you have a small pension pot (individually below £10,000 or up to three valued at less than £30,000) you may be able to take the whole pot as a lump sum under the current ‘triviality’ rules (from April 2015 you will be able to take the whole pension as cash, subject to marginal tax rates at the time)
If an income is important to you, consider all the different options available to you, such as an annuity, an investment-linked annuity and income drawdown. Each of these comes with different risks – income from drawdown or an investment-linked annuity could fall in future (although hopefully it will increase)
Consider the ‘cost of delay’ – if you are looking for a secure lifetime income, then an annuity is likely to be your safest option. By delaying any decision until next year, you are losing out on income this year, which could take many years to make up
Think about how much flexibility you need over your income, bearing in mind you may be in retirement for 20 plus years. And if you want to protect your spouse or partner if you die
With annuities the income is guaranteed but may come with the risk of inflation which means the income you receive may not buy as much in future – you can protect your income from inflation but this comes at a cost
If you buy an annuity don’t just buy it from the company you saved with. Make sure to shop around other providers, giving full information about your health and lifestyle – this can help you get a substantially bigger income
Consider taking independent advice. It’s important to get it right. A qualified adviser can help you do that.