35,000 vs 240,000

hugheskevi

Think I read somewhere earlier in the week that the average pension pot upon retirement is 35k, but that to get a yearly income of 16k you need 240k to buy an annuity with

Association of British Insurers figures show the average (mean) annuity purchase price was £33,455 in 2012 (source here). However, as with all statistics this requires careful interpretation.

Firstly, many purchasing annuities will also have Defined Benefit (including final salary) pensions - Defined Contribution pensions have only replaced Defined Benefit pensions in the workplace over the last 15 years or so. Secondly, many of those with larger pots will use drawdown rather than purchase annuities. Thirdly,folk may purchase more than one annuity. Fourthly, most households at point of retirement will have two people with pension incomes (moreso going forward than in the past though). So average annuity purchase will significantly underestimate average retirement income.

Looking at income sources of couples aged within 5 years of State Pension age, the average income in 2011/12 was £34,500. This was split into 33% from the State, 28% from occupational pension (which will be mostly if not all Defined Benefit income), 26% from earnings, and 14% from other sources. So private pension income is only a part of the picture.

How are people supposed to save 240 (thousand in a pension) when they can't afford to buy a house or rent?

Assuming a couple with a State Pension of £300 p/w (based on future single tier pension amount), if they had private pension income of £16k p/a (£308 p/w), that would be a total pension income of over £600 p/w without income from any other assets or earnings. If that pension income is 60% of working life income (a typical replacement rate), they had a working life income of £53,000 p/a.

That should have been enough to buy a house or rent.

Some of that often comes from employer, some from tax relief, and a whole load from investing sensibly. If you start early and contribute appropriately, it's not too hard.

Absolutely.

If I assume our employers paid 80% of the cost of my wife's and my Defined Benefit pensions, then the source of my pension (combined with wife's pension) is 44% from employer, 34% from individual and 22% income tax relief.

That doesn't include any growth as that makes the calculations rather hard and assumption-driven given the mix of DB and DC pensions, suffice to say those 3 percentages above are very much top-end estimates.

So even though the wife and I are making some fairly large personal pension contributions, still only about a third of the pension value comes from money I could have had to spend today.

It is ultimately all about priorities - I could easily have spent most of that 34% rather than putting it into personal pensions but I prefer to prioritise pensions. So despite not earning as much as some folk (although admittedly more than many), at age 36 we have combined pension wealth worth well in excess of that £240k figure, most of which has been saved over the last 6 years.

But I also have a mortgage in the hundreds of thousands as well though - again that is about priorities, as some folk prefer to focus entirely on reducing their mortgage whilst I prefer to benefit as much as possible from pension tax relief and low interest rates and mortgage reduction is a low priority. So as well as employer contributions, investment growth and tax relief, to get full benefit you need planning.

tir21

Whats drawdown

tony4147

jamesd wrote: »

For someone 40 years from retirement it takes only £156 a month gross to get to £240,000. If in a scheme with 100% employer match that drops to a net cost of only £62.40 after tax.

The report is saying £240k TODAY .........in 40 years time £240k won't be £240k, it will be a lot less!!

jamesd

The growth rates used are all after inflation and the monthly amount is also assumed to increase with inflation, so it will be £240k in today's money.

Linton

tony4147 wrote: »

The report is saying £240k TODAY .........in 40 years time £240k won't be £240k, it will be a lot less!!

Your contribution would also be expected to increase with inflation and the assumed investment return is in addition to inflation. So it should all cancel out.