Annuity of £250,000 required to match state pension income

Pensioners would need to purchase an annuity for £250,000 from state pension age of 66 to match the weekly income of the full new state pension, according to analysis from Aegon.

The provider said its findings emphasised how vital the state pension was to so many, with more than 95 per cent of people expected to rely on it in retirement.

“For millions of people, the state pension is the bedrock of their retirement plans,” commented Aegon pensions director, Steven Cameron.

“While the full new state pension’s £221.30 a week won’t provide a life of luxury, to buy a lifetime guaranteed income to match this from state pension age (66) would cost a staggering £250,000.

“Put another way, unless you’ve built up a pot of over a quarter of a million pounds in your private or workplace pensions, the state pension will make up the majority of your retirement income.”

Aegon’s analysis of the cost of matching the state pension through private pension savings was based on what it would cost for someone in good health to buy an income equal to the state pension, paid monthly in advance, and increasing in line with RPI inflation using the average of the top three annuity quotes from MoneyHelper on 30 August.

Furthermore, Aegon argued that pensioners reliant on their state pension will be “particularly anxious” about the government’s warning of tough times ahead, with those not entitled to pension credit expecting to see their winter fuel allowance withdrawn and speculation that the state pension could be means tested going forward.

“It’s not surprising that people are very reliant on the state pension to support their retirement living standards,” Cameron continued.

“Our own Second 50 research has shown for two years running that over 95 per cent of people expect to rely on it, to varying degrees. This was before an estimated 10 million people lost their winter fuel allowance, and for many of them, every penny of their state pension really matters.

“The fact is that the state pension is worth a huge amount of money, and any suggestion that it might be ‘means tested’, so reduced or even removed for those with other retirement income above a given level, would send shockwaves through the pensioner community, impacting hugely on living standards for all but the truly wealthiest of wealthy.

“One way to secure a guaranteed income is to buy an annuity. Based on current annuity rates, a couple would need half a million pounds to ‘buy’ their state pension privately. And while this looks huge, it’s based on terms available today which are much better than they were a few years ago as annuities cost less when interest rates are high.

“With expectations that interest rates are likely to fall back to lower levels in the coming years, the cost will likely rise, making the state pension even more valuable. While many individuals now leave their pension pot invested and draw down an income, you’d still need a similar sum to be able to draw an amount equal to the state pension without taking too much risk that your money might run out before you do.”



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