A nation fooling itself

More than half Britain’s workers will be forced to rely on state hand-outs in retirement, although most have fooled themselves into expecting a comfortable old age, a new pensions study shows.

The Pension Map of Britain 2003, a study by JPMorgan Fleming, the investment bank, paints a grim picture of a nation of workers that is failing to save for retirement but clinging to the belief that they will have a retirement income of almost £19,000 a year.

Instead, the bank warns them that three in four working adults will have to survive on an income of less than half their final salary. The average British salary is now £24,603. To achieve a retirement income of £19,000, workers would have to retire on 77 per cent of the average salary.

According to JPMorgan Fleming’s study, 40 per cent of workers are unconcerned about the amount of income that they will retire on, and 43 per cent have not made any pension provisions at all. Less than 60 per cent believe that they will have a comfortable retirement.

The figures add up to a huge mismatch between harsh financial reality and people’s expectations, says Simon Crinage, investment trust client director at JP Morgan Fleming. Mr Crinage says that the number of workers who can expect to enjoy a comfortable retirement is rapidly declining.

On the map, released yesterday, the bank has outlined where the country’s poorest pensioners will live. It shows that workers in the South West and North East will suffer the most in retirement, while those in Northern Ireland, the East Midlands and Greater London will be more comfortable.

To come up with its predictions, the bank made projections based on the pension contributions, income and age of every person now working, full-time or part-time, in Britain. It then used a level-term annuity rate to divide workers into three groups, depending on what percentage of final salary they would retire on at the age of 65.

The three groups were labelled comfortable, OK and difficult. Workers in the comfortable group can expect to retire on an income equal to 50 per cent or more of their final salaries, while those in the OKgroup will retire on between 40 and 50 per cent of their final salaries. Those in the difficult group can expect to retire on 40 per cent or less of their final salaries and are likely to be reliant on government benefits.

Since JPMorgan Fleming first produced the map, in 1996, another five million people have fallen into the difficult group, and the number of workers who can expect to retire comfortably has diminished by 3.4 million.

Mr Crinage puts the blame for the deterioration of Britain’s pension provision on falling equity markets, declining annuity rates and the closure of many final salary company pension schemes.

According to the study, workers in Northern Ireland have the best retirement prospects, with 35 per cent likely to be comfortably off in retirement.

The South West region has the worst retirement prospects: only 19 per cent of workers living there can expect a comfortable retirement. The prospects for workers in the North East are equally dim, with 63 per cent in the difficult group.

The South East has experienced the greatest deterioration of retirement prospects, with the number of workers who can expect a comfortable retirement dropping from 61 per cent in 1997 to 26 per cent this year.

East Anglia is the only region where workers have increased their chances of a comfortable old age. In 1996, only 22 per cent could expect to be comfortably off. This year, 30 per cent made it into the comfortable category.

Workers in Greater London are now considerably more likely to be poor in retirement than they were in 1996, because the proportion who have fallen into the difficult group has increased from 26 to 46 per cent. About half of all workers in the East and West Midlands, North West, Yorkshire, Wales and Scotland can expect a difficult retirement, based on present figures.

Mr Crinage says that a massive increase in retirement saving is the only measure that can recover the situation for some workers. He calculates that, on average, British working adults need to save an extra £280 a month, or £3,360 a year, to retire on at least 50 per cent of their final salary.

“Even additional contributions at a more affordable level of £100 a month will shrink the number of people facing financial difficulty from 53 to 35 per cent,” Mr Crinage adds. “Unfortunately, it’s not that simple. Our research shows that 27 per cent of workers claim that they don’t have any spare money to put into a pension.”

He believes that this situation will not change “until we see a reverse in Britain’s debt burden, which has been fuelled by the housing boom and by unsecured borrowing”.

Mr Crinage concludes that there needs to be a concerted effort to educate people from an early age about the importance of saving if the nation’s present pension problems are not to become worse.





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