Typical UK worker to retire on just £215 per week

The typical UK worker is on course to retire on just £215 per week, less than half of national average earnings and below the current minimum wage, according to the third annual Fidelity Retirement Index.

The index, built on complex financial modelling and a survey of more than 1,000 people, indicates that people are set to see their income drop by 53% on reaching retirement. This figure covers all sources of income, including State pension benefits and private pensions.

The median weekly wage in the UK is £457, so a 53% decrease equates to a retirement income of £215 per week, less than the weekly income of those who work a 40 hour week on the minimum wage of £5.52 per hour. They take home just over £220.

While the level of the Fidelity Retirement Index is down from last year (a 50% fall was indicated in 2006), it is slightly up on 2005 when workers faced a 58% drop in income at retirement. But overall prospects could rapidly deteriorate as defined contribution (DC) pensions replace defined benefit (DB) schemes.

Members of DB schemes, whose pension is commonly linked to final salary and length of service, expect to retire on two-thirds of pay after 40 years of service. But workers in DC schemes, where retirement income is tied to contribution levels and investment performance, are on course for just 38% of salary in retirement - a decrease of 62% or less than £174 per weekfor someone on average earnings.

Simon Fraser, President of the Retirement Institute at Fidelity International, says: "There's nothing inherently wrong with defined contribution pensions. In fact, DC is arguably a better solution for today's highly mobile workforce. But the move from DB to DC is often accompanied by a review of contribution levels, sometimes to the detriment of employees. It is a shocking thought that, if this is not corrected, we could see the emergence of a generation of private pension paupers."

UK losing ground in international pension stakes

Fidelity now publishes similar retirement indices in a number of countries, including the United States and Germany. The UK does not fare well in the comparison. While British workers are on course for 47% of their pay in retirement, Germans have a replacement rate of 56% while Americans are on track to receive 58% of salary in retirement. Only Japan is on a par with the UK with a similar replacement rate of 47%.

Simon Fraser says: "While the movement from DB to DC schemes isn't a uniquely British phenomenon, the maturity and significance of occupational pensions in the UK means that this trend is much more pronounced. With Government still also committed to means testing, for example, there is a danger that the "real" difference may be much greater for future generations of UK retirees than the headline figure suggests."