UK retirement income among lowest in OECD countries

The United Kingdom has one of the lowest average retirement incomes among all the countries in the Organisation for Economic Cooperation and Development.

The Pensions at a Glance report by the OECD revealed that average earners without a private pension in the UK have the third lowest ‘replacement rate’ (The drop in income when moving from work to retirement) in the OECD.

The basic state pension amounts to 16 per cent of average earnings, with most countries in the OECD being around 20.5 per cent.

However, the report said the new single tier pension, which will be introduced in April 2016, should increase the basic pension for the majority of future pensioners. It said the new state pension will bring the average earnings amount to 22 per cent, in line with the pension credit safety-net.

The introduction of the new state pension means the UK will join New Zealand and Ireland in being the only countries not to have a mandatory second tier pension. This means future benefits will be lower than today’s level for those who would have continued to contribute to the state second pension.

However, this will be higher for people who opted out of, or made small contributions to, the state second pension as the new state pension is at a higher level.

According to the report, public expenditure on pensions is expected to increase from 7.7 per cent to 8.4 per cent over the next 50 years, under EU economic assumptions. The OECD said that if retirement ages increase by five years by 2060, it would almost fully offset the increase, unless productivity gains are low enough to make the triple-lock condition unaffordable.

Commenting on the report, Hargreaves Lansdown head of retirement policy Tom McPhail said the report makes “embarrassing reading” for the politicians who have been responsible for the UK's pensions over the past 25 years.

“The state pension was in steady decline for years and even now, is improving for lower earners but average pay-outs will not be rising. It is in the private sector though where the real damage has been done; the collapse in final salary pensions has not yet been replaced with well-funded alternatives.

“Auto-enrolment and the pension freedoms may help to re-engage investors with retirement saving, the challenge now is to make sure the amount being invested into pensions is increased as quickly as possible."

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