£300,000 pension pot needed 'to maintain current lifestyle in retirement'
Pension savers on average earnings face needing to build a pot of more than £300,000 typically to buy a retirement income big enough to maintain their current lifestyle, analysis suggests.
The findings from Aegon assumed that people on an average annual salary of around £27,000 should be targeting an income equivalent to two-thirds (67%) of their working age income - £18,000 a year or £1,500 a month.
To plug the gap, an average earner entitled to the full state pension of £691 a month would need another £809 a month from workplace and other private pensions to meet the target.
Aegon's analysis of annuity rates found that at age 65, someone in good health would need a pension fund of £301,500 to buy a guaranteed income for life which would fill the gap.
Someone earning £13,000 would need a pot of around £65,300 to maintain their current lifestyle, while someone earning £56,000 would need to build up a £612,700 pot, according to Aegon's calculations.
The research assumed someone earning £13,000 would need an income equating to around 80% of their working-age pay, while someone on £56,000 would need around half (50%) of their current income in retirement to maintain their current lifestyle.
The pension freedoms launched in 2015 generally mean that over-55s now have a much wider range of choices over how they use their pension pot and they are no longer required to buy an annuity.
Annuities can give retirees a set income for life, guaranteeing that they will not run out of money in their old age, but they have been controversial due to falling rates in recent years and claims that people are not shopping around to get the best annuity deal.
A recent Government review of automatic enrolment into workplace pensions estimates there are still about 12 million people under-saving for their retirement, representing 38% of the working-age population.
Steven Cameron, pensions director at Aegon, said: "It's perhaps not surprising that people are under-saving when you see how much generating an annual income of £18,000 costs.
"The amount is so high because life expectancies have grown significantly in recent decades and long-term interest rates, on which annuities are based, are currently very low.
"All these figures assume that people will be able to top up their income with the full state pension of £8,300 per year, but it's important to check what you're actually due as many people will receive less."
Minimum contributions into workplace pensions will gradually be increased in the coming years.
At present the minimum contributions are set at 2% of qualifying earnings, of which 1% must come from the employer.
In April, minimum contributions will increase to 5%, including 2% from the employer.
In April 2019 the minimum contribution rate will rise to 8%, with 3% from the employer.
Mr Cameron said the earlier people can take steps to put a bit more money aside, the better.
He said: "Previously, many people planned their retirement around when their state pension would start and used their retirement fund at that age to buy a regular income for life.
"The pension freedoms introduced in 2015 have proved hugely popular and many individuals are dipping into their pensions, or even cashing them in entirely from as early as age 55, long before they reach state pension age.
"While this is an attractive option for those who can afford it, the more that's taken earlier, the less is left to maintain lifestyle in later years of retirement."