DC savers on the rise but they’ll retire on a quarter less than DB members
There are two types of private pension: DC is where savings contributions are invested to build up a retirement pot while DB is based on final salaries and years worked.
According to a report by the Centre for Economic and Social Research (Cebr), the total number of active DC pension members is expected to overtake the number of DB active private and public members by 2018.
It comes as active members of DB private sector pension schemes fell by two million (56% of total) between 2004 and 2014, while the number of members of DC private sector pension schemes increased by two million (167%) from 1.2 million to 3.2 million.
And of the 2.5 million entrants into private sector occupational pension schemes in 2014, 2.4 million (94%) invested in DC pensions.
This number is likely to have been propelled by the introduction of auto-enrolment, with the numbers expecting to rise from 10 million in 2014 to 18 million by 2020. According to The Pensions Regulator, the number of active DC savers overtook DB membership for the first time as of 31 December 2014, but these figures only include the private sector.
However as DC schemes are expected to overtake both public and private DB schemes, Saga Investment Services which commissioned the research, found the average employee contributions to DC pensions, at 1.7%, was just over a third of the 4.9% contributions to DB schemes.
For those earning £25,000 each year over a 25-year period (assuming 2.5% annual salary increase) they will have contributed close to £180,000 to their pension. But those on a typical DC contribution rate their total would only save £40,000.
Saga warned that many working people today are set to be disappointed with their income in retirement. This is because they are likely to be contributing too little to their pension pots to enjoy what many would consider to be an acceptable standard of living in later life.
At the same time Cebr warned that many individuals are probably underestimating the amount of savings they need to fund their desired lifestyle in retirement.
If a healthy 65-year-old purchases a single inflation-linked annuity today for £150,000, it can be expected to yield a retirement income of less than £4,700 in the first year.
Nici Audhlam-Gardiner, managing director of Saga Investment Services, said: “The report underlines how vital it is for people to plan better for their retirement, to know how much is in their pension pots and to understand their financial needs when they finish working.
“Many working today will enjoy good living standards, benefiting from high levels of wealth including property investments and solid pension incomes, but those who have not planned well in advance could risk a lower than expected level of living in retirement.”
Audhlam-Gardiner said a DB pension-holder would have a pensions pot five times greater in value than the DC pension-holder and with millions more workers in the UK set to have an occupational pension – the vast majority of which will be DC schemes – means the conditions are “creating a perfect storm with a need to provide pensions advice and planning on a scale never before seen”.