Three-quarters of workers could be hit by Brexit-induced pension shortfall



Experts warn of short-term ‘carnage’ as millions will need to save more – or work longer – to enjoy an adequate retirement income

Falling interest rates and weak post-Brexit growth predictions mean that three-quarters (75 per cent) of UK workers are at risk of receiving a retirement income that’s below the government’s recommended minimum level, according to a new report.

Based on the analysis of 500,000 defined contribution (DC) savers pension plans, consultancy firm Hymans Robertson found that 50 per cent of workers have an extremely low chance of reaching the level of retirement income regarded as appropriate by the Department for Work and Pensions (DWP). Only 25 per cent have a good chance of meeting that level.

Many workers paying into DC schemes will therefore need to pay more into their pensions, accept a lower income in retirement or work for longer.

“It is terrifying that such a large proportion of the population that is due to retire in the next 20 to 30 years will be receiving an income below the level regarded as adequate by the government,” said Chris Noon, head of workplace savings at Hymans.

“We are in a post-Brexit world of low yields in which risk-free assets are generating little or no returns. This makes the cost of providing pensions more expensive. Evidence of this can be seen in the fact that the cost of purchasing an annuity [which provides a guaranteed income for life] is up by as much as 30 per cent since Brexit.

“Changes to the economic outlook mean the average employee may need to save 2 to 3 per cent a year more over their lifetime to deliver the same level of pre-Brexit income.”

According to DWP calculations, a UK worker with an average annual salary of £30,000 would need a pension of £20,000 per year to maintain their standard of living, which takes into account reduced living costs during retirement. Someone who retired on a salary of £70,000 would need around £35,000 a year.

The cumulative effect means that people could be working into their 80s before they have a pension they can retire on, said Richard Farr, managing director at Lincoln Pensions. “Brexit may be liberating in the long run, but in the short term it will be carnage.”

Jon Hatchett, head of corporate consulting at Hymans, said: “Expected lower returns from assets because of an uncertain economic outlook don’t just hit those with relatively generous defined benefit (DB) schemes. The majority of the working population will be saving into and retiring with DC pension pots. Many will be falling back on the state pension, but that will be lower for the majority too.

“We should not be lulled into a false sense of security with auto-enrolment. While it’s been a huge success with low levels of opt-outs, with contributions at 2 per cent of pay it doesn’t even come close to securing a decent retirement income. It now takes 50 per cent of pay to fund a decent DB pension at current retirement ages. You don’t have to be an actuary to see that this is a car crash waiting to happen. The hike up to 8 per cent of contributions in 2017 doesn’t go nearly far enough.”


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