Millions relying on just £7k a year in retirement

The poorest pensioners are relying on the state pension for three quarters (78 per cent) of their income, according to research from the Pensions Policy Institute (PPI).

The analysis,  sponsored by Age UK and based on data from The English Longitudinal Study of Ageing (ELSA), which has been following households aged 50 plus every two years over the period 2002 to 2015, also showed the dependency increases to 86 per cent when state benefits are included.

According to the report, the state pension is an important part of retirement income for all savers, except for the lucky few with the greatest retirement incomes.

Pensioners in the middle level of the income distribution get more than half their income –  53 per cent –from the state pension, increasing to 61 per cent when state benefits are included. 

Younger individuals rely less on their state pension than older ones, but as they age they become more dependent, the study concluded.

For example, the average of pensioners born in the 1930s received 30 per cent of their income from the state pension at age 65, which increases to 44 per cent when they reach the age of 74.

While people's non-state income levels at the point of retirement may appear good, finances often become considerably less rosy over time – earnings from work may stop and other sources of income may lose value in real terms, meaning these individuals become more reliant on state pension, the PPI said.

According to Caroline Abrahams, charity director at Age UK, "many people are surprised to learn that the average state pension is only just over £7,000 per year".

This is "less than half the annual salary of a full time working adult on the minimum wage of £7.50 an hour," she added.

She said: "Yet relatively modest though this sum may be, the state pension is still the main source of income for millions of older people in this country, a situation that is set to continue for the foreseeable future."

The government announced in July that the state pension age increase should be brought forward to 68 between 2037 and 2039, due to increases in life expectancy.

Under the current law, the state pension age is due to increase to 68 between 2044 and 2046.

The change to the state pension age will leave 7.6 million people £10,000 worse off, according to analysis by the House of Commons Library.

From next April, the rate of the state pension for new pensioners will increase in line with inflation by £4.80 from £159.55 to £164.35 per week.

For Timothy Pike, head of modelling at the PPI, the "state pension is a consistent source of income when other sources may lose their value or be completely lost".

It "has also helped to protect women in widowhood against the loss of a husband’s private pension income,” he added.

He said: "In future the state pension will underpin a system which places more responsibility upon individuals, providing long-term protection against changing circumstances and inflationary pressures."

According to Malcolm McLean, senior consultant with Barnett Waddingham, "living on or close to the level of the state pension alone is no joke."

He said: "Relying on the state pension on its own will never give most people anywhere near the standard of living they might hope to have in their later years.

"And it gets worse as they get even older and the reserves of savings they might have at retirement age start to dwindle and then disappear altogether."

According to Mr McLean, the UK has one of the lowest state pensions in the civilised world and with an ageing population, pressures on funding and serious doubts about the long-term sustainability of the triple-lock things are unlikely to improve in the foreseeable future.

He said: "For the younger generation the message is clear. You will have to put money aside during your working years to give yourself a supplementary income to bolster your state pension in retirement, or face up to the possibility of relative poverty in your old age.

"Auto-enrolment will give most workers an opportunity to pay into a workplace pension scheme and be supported by an employer contribution and government tax relief.

"Think very carefully before deciding to opt-out. Your future well-being and a better lifestyle in your ‘golden years’ could well depend upon it."

Source: FT ADVISER