London 30 May 2008: The typical UK worker is on course to retire on just £215* per week, less than half of national average earnings and below the current minimum wage, according to the third annual Fidelity Retirement Index.
The index, built on complex financial modelling and a survey of more than 1,000 people, indicates that people are set to see their income to drop by 53% **on reaching retirement. This figure covers all sources of income, including State pension benefits and private pensions.
The median weekly wage in the UK is £457*, so a 53% decrease equates to a retirement income of £215 per week, less than the weekly income of those who work a 40 hour week on the minimum wage of £5.52 per hour*. They take home just over £220*.
While the level of the Fidelity Retirement Index is down from last year (a 50%** fall was indicated in 2006), it is slightly up on 2005 when workers faced a 58%** drop in income at retirement. But overall prospects could rapidly deteriorate as defined contribution (DC) pensions replace defined benefit (DB) schemes.
Members of DB schemes, whose pension is commonly linked to final salary and length of service, expect to retire on two-thirds of pay after 40 years of service. But workers in DC schemes, where retirement income is tied to contribution levels and investment performance, are on course for just 38% of salary in retirement – a decrease of 62% or less than £174 per week*for someone on average earnings.
Simon Fraser, President of the Retirement Institute at Fidelity International, says: “There’s nothing inherently wrong with defined contribution pensions. In fact, DC is arguably a better solution for today’s highly mobile workforce. But the move from DB to DC is often accompanied by a review of contribution levels, sometimes to the detriment of employees. It is a shocking thought that, if this is not corrected, we could see the emergence of a generation of private pension paupers.”
UK losing ground in international pension stakes
Fidelity now publishes similar retirement indices in a number of countries, including the United States and Germany. The UK does not fare well in the comparison. While British workers are on course for 47%** of their pay in retirement, Germans have a replacement rate of 56%** while Americans are on track to receive 58%** of salary in retirement. Only Japan is on a par with the UK with a similar replacement rate of 47%**.
Simon Fraser says: “While the movement from DB to DC schemes isn’t a uniquely British phenomenon, the maturity and significance of occupational pensions in the UK means that this trend is much more pronounced. With Government still also committed to means testing, for example, there is a danger that the “real” difference may be much greater for future generations of UK retirees than the headline figure suggests.”
FIL Limited (“FIL”) and its subsidiary companies serve the major markets of the world by providing investment products and services to individuals and institutional investors outside the US. FIL Limited manages a total of £130.4 billion of assets***.
Notes to editors:* Source ONS April 2008
** Source Fidelity Retirement Institute, Improving Britain’s Retirement Prospects 2006, 2007 and 2008
*** Source Fidelity as at 31.03.08Any opinions expressed are made at the time of writing and can be subject to change without notification. The value of investments can go down as well as up and an investor may not get back the original amount invested. For funds that invest in overseas markets, changes in currency exchange rates may mean that the value of your investment goes up or down. Investments in small and emerging markets can be more volatile than other more developed markets. Past performance is not a guide to future returns. FIL Limited was established in Bermuda nearly 40 years ago and provides asset management services to investors outside of the Americas. FIL Limited and its respective subsidiaries form the global investment management organisation that is commonly referred to as Fidelity or Fidelity International. Past performance is not a reliable indicator of future results. Unless otherwise stated all products are provided by FIL Limited, and all views expressed are those of Fidelity. Assets and resources are of FIL Limited, unless otherwise stated, and were accurate as at 31.12.07. Fidelity only gives information on its products and does not provide investment advice based on individual circumstances. The document may not be reproduced or circulated without prior permission and must not be passed to private investors. The value of investments may go down as well as up and an investor may not get back the original amount invested. FIL Limited, Fidelity, Fidelity International and Pyramid Logo are trademarks of FIL Limited. Issued by FIL Pensions Management (FSA registered number 144345) a firm authorised and regulated by the Financial Services Authority. FIL Pensions Management is a member of the FIL Limited group of companies and is registered in England and Wales under the company number 02015142. The registered office of the company is Oakhill House, 130 Tonbridge Road, Hildenborough, Tonbridge, Kent TN11 9DZ, United Kingdom. Fidelity's VAT identification number is 395 3090 35.
