With inflation predicted to rise above its long term average rate in 2017, Investec Wealth & Investment is warning pension savers against overestimating the buying power of their future retirement pot.
Its research shows that half (49 per cent) of pre-retirement pension savers aged 35 to 54 think that a pension pot of GBP1 million – the current lifetime allowance – in 2043 could provide a golden retirement, but taking into account the average long term rate of inflation its value would have halved in real terms.
Assuming a pension saver retires in 27 years’ time with a retirement pot of GBP1 million and drew an annual income of 4 per cent or GBP40,000, this would be worth no more than GBP20,000 in today’s terms, around GBP7,000 less than the current average UK salary.
IW&I’s research shows that most investors have unrealistic retirement expectations. On average, workers earning a minimum of GBP50,000 a year are looking towards their private pension to produce almost half (44 per cent) of their salary as income but in reality the average is around a third.
According to the research, a quarter (26 per cent) of respondents said they expect their private pension to provide more than half their current salary, while one in 14 (7 per cent) estimated it would match it.
Simon Bashorun, financial planning director at Investec Wealth & Investment, says: “Many pension savers in their 30s and 40s think a pension pot reaching the lifetime allowance of GBP1 million will pay for a gold-plated retirement but our research suggests otherwise.
“With inflation expected to continue rising, pension pots and savings in general will be worth much less in the future. Many savers tend to forget this when they’re drawing up their retirement objectives and end up overestimating how much income they will receive. As higher earners with a decent private pension tend to get around a third of their salary, this can turn out to be an unpleasant surprise.
“A significant increase in the lifetime allowance limit of GBP1 million seems unlikely in the near future, and so people looking forward to enjoying a comfortable retirement shouldn’t rely solely on their pension but instead spread their investments across other tax-efficient vehicles such as ISAs.”