Private sector workers

Figures show the lowest company pension levels since the 1950s

The number of private sector workers with a company pension has fallen to its lowest level since the 1950s according to figures from the Office for National Statistics (ONS). Of the total private sector workforce of 23.1m, only 3.3m – some 14 per cent – are in a company scheme. This contrasts starkly with the public sector, where almost nine in ten will receive a pension.

The ONS recently published its latest Pension Trends report, and although it did not include provisions such as Stakeholder or Group Personal Pension schemes, it shows that 5.4m of the UK’s 6.2m public sector workers have a generous company pension – close to a record high.

Private sector

The figure for the private sector has fallen to its lowest for decades. Since 1997, the proportion of private sector workers with a guaranteed defined benefit pension has dropped from 34 per cent to 11 per cent. This is the type offered to all State workers, which promises to pay a percentage of their final salary, or the average over your career, when they retire.

Joanne Segars, chief executive of the National Association of Pension Funds, warned that Britain’s ageing society is on ‘a collision course with its own retirement’ as it fails to save enough.

She said: ‘Far too many people are either choosing not to bother with their workplace pension, or are not being offered one in the first place.

‘This is storing up huge problems for the future. Those relying purely on a State pension face a rude shock come retirement and the grim prospect of their final decades spent in poverty.’

The basic State pension is currently worth a little over £100 a week, although many are not eligible to claim the full amount. The typical public sector worker enjoys a pension of £7,841 a year, or about £150 a week.

If a private sector worker happens to be in the minority that gets a company pension, the average payout is in the region of £1,300 a year – just £25 a week.

Families find discussing their finances and mortality ‘uncomfortable

The latest Aviva Family Finances Report reveals that many UK families are putting luxuries ahead of protecting their loved ones financially.

The report discovered that while 50 per cent of families are happy to pay for a satellite television package, just 40 per cent have life insurance. It also found that families are more likely to have insurance for their mobile phone (14 per cent) than insurance that will protect their family financially if they were to suffer a critical illness (13 per cent).

Similarly, more people have taken out an extended warranty on electrical items (13 per cent) than have income protection insurance, which would potentially pay an income for life should they be unable to work as a result of an accident or illness (10 per cent).

Lack of understanding
The report also reveals that the majority of UK families are avoiding the issue of what they would do if something happened to an income earner because they find discussing their finances and mortality ‘uncomfortable’. This is in spite of the financial worries that could be caused by not having protection, exacerbating emotional distress at a difficult time. As a result, many families ignore the issue and fail to appreciate the value of protecting their family compared to spending on other items.

Avoiding putting measures in place
No one likes to dwell on poor health or mortality, but by denying that illness – or worse – is even a possibility, people are avoiding putting measures in place to protect their loved ones. Too many people assume that someone else will step in and look after their families if they weren’t there to provide for them, but the reality is very different.

People need to ask themselves just how they would pay for their mortgages, their food and all the other costs of living should they suddenly lose an income. While no one likes to think about ‘what ifs’, by not even considering these scenarios, people could be putting the future financial security of their families at unnecessary risk.

Source – The Aviva Family Finances Report is an in-depth study into the financial needs of the 84 per cent of the UK population who live as part of a modern family.

Data was sourced from the Aviva Family Index, which used findings from over 10,000 people who are members of one of the six groups of families identified above via Opinion Matters. This report is a definitive appraisal of the personal finances of families in the UK. Not only does it look at personal wealth, income sources and expenditure patterns, but also tracks how these change across the different types of family unit.

The burden of tax in retirement

The average UK pensioner household pays out 29 per cent of its income in retirement to the taxman through a combination of direct and indirect taxation, which adds up to an annual tax bill of nearly £42bn, new analysis
[1] from MetLife shows (25/07/12).

Pensioner household income
On an average gross pensioner household income of £20,130, that equates to £5,864 paid out in tax, with income tax accounting for nearly £1,501 of the bill and indirect taxes including VAT totalling £1,937. Council tax is the third-largest tax burden, accounting for
5.8 per cent of gross income.

With an average tax liability of £5,864 for the UK’s 7.15 million retired households, the bill from direct and indirect taxation equates to around £41.9bn. In total, direct taxes, including income tax and council tax, account for 12.2 per cent out of the 29 per cent tax burden with indirect taxes, including VAT, duty on tobacco, alcohol and petrol, vehicle excise duty and TV licences, accounting for 16.8 per cent.

Direct and indirect tax
However, less well-off households proportionally pay out the most in direct and indirect tax with 42 per cent of their gross household income being paid out in tax. The bottom tenth of pensioner households, in receipt of gross income estimated at £8,259 a year, pay £3,599 in taxes.

The top 10 per cent of pensioner households, with gross income of £47,992, see 29 per cent of their income going in direct and indirect tax.

Planning for retirement 
Pensioners need to think about the effects of direct and indirect tax on their retirement income and plan accordingly. With 29 per cent of gross retirement income being swallowed up by tax, it is clearly a major factor to consider when planning for retirement.

When you add in the potential effects of inflation in a retirement lasting up to 20 or even 30 years, it is clear that savers need to consider all retirement income solutions in order to achieve a degree of certainty.

Investments and savings

MetLife’s analysis shows that the average retired household receives 40 per cent of its gross income from private and occupational pensions, with 39 per cent coming from the State Pension and the rest coming from investments and savings plus other benefits. The average private pension pays £8,134 per household before taxes.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from taxation, are subject to change.

[1] MetLife analysis of the ONS Wealth and Assets Survey. ONS estimates that there are 7.151 million retired households.