Analysis by Aviva has revealed that the new state pension combined with minimum automatic enrolment contributions to a private pension, will only deliver acceptable income replacement rates for younger lower earners.
The replacement rate is the percentage of an employee’s ‘in-work’ income, which they will receive in retirement.
The following table sets out projected replacement rates based on a combination of the new state pension and a private pension derived from automatic enrolment contributions of 8% of band earnings:
| Age today/at which saving starts and projected state pension age (SPA) based on age today | ||||
| Income | 22 (SPA 74) | 32 (SPA 72) | 42 (SPA 69) | 52 (SPA 67) |
| £13,250 (half average earnings) | 75% | 68.1% | 62.8% | 59.5% |
| £26,500 (average earnings 2011/12) | 53.4% | 44.1% | 36.8% | 32.3% |
| £53,000 (twice average earnings) | 36.3% | 28.1% | 21.6% | 17.7% |
Assumptions:
- Average earnings based on ONS data for 2011/12
- Earnings, pension contributions and state pension all grow at 1.5% a year faster than price inflation
- Gross investment returns are 6.5%
- Inflation is 2.5%
- Pension charges are 1%
- State pension age increases by 1 year every 5 years after the current planned increase to age 67 by 2028
- Accumulated pension fund at projected SPA is converted to an income on the following basis:
- Best annuity rates as at 14/1/2013, sourced from Money Advice Service
- RPI-linked single life annuity, paid monthly in arrear, postcode EH42
John Lawson, Aviva’s Head of Policy for Corporate Benefits said: “The new state pension is a big step in the right direction, making it clear what people can expect at retirement. However, for most people, this is still woefully inadequate even when private pension income from automatic enrolment contributions is added in. Realistically, between them and their employer, people need to be saving between 15% and 20% of their income to enjoy a comfortable retirement.”
Media contact: Diane Mangan 07800 691 714 diane.mangan@aviva.co.uk