Savings crisis widens public-private gap

Savings crisis widens public-private gap

The gap between private and public sector workers' pensions is growing as household saving rates continue to decline, according to a report published yesterday.

Financial adviser Hargreaves Lansdown said official figures show the credit squeeze has taken its toll on Britain's appetite for retirement, which means that many people will have much lower retirement incomes than they expect. More than a million workers stopped paying into their personal pension plans over the past year, according to a report yesterday.

Figures from HM Revenue & Customs showed that over the past year the number of people paying into a personal pension dropped by a million to 7 million.

The figures also confirm that the average pensioner will receive only a modest boost to their state pension from their savings when they retire. In 2007 the average pension fund used to buy a retirement income was £33,500, which at today's annuity rates for a 65-year-old male would produce an income of £1,380 a year.

According to the Office of National Statistics, on average a single pensioner receives about £3,000 a year from private pensions; this includes the value of their occupational pension benefits such as final-salary schemes.

The household savings ratio, which measures the proportion of income saved each month, has also dropped in the past year to 1.1% - the lowest level since the 1950s. In 1993 the figure stood at 10.7%.

Tom McPhail, the firm's.....continued below

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head of pensions research, said the decline in saving highlighted the growing gap between public and private sector pension provision.

He said the government's refusal to put aside money to fund public sector pensions meant they were becoming increasingly unaffordable and called for a review along the same lines as Lord Turner's Pensions Commission.

The report argues that reforms to public-sector pensions have done little to ease the burden of funding schemes that are largely left to future generations to maintain. It accuses the government of allowing what it calls the "big five schemes" in the NHS, the armed forces, the police, the teaching profession and the civil service to remain unfunded and therefore a burden on taxpayers in decades to come.

A combination of baby boomers reaching retirement age and a promise to pay a guaranteed pension income of two-thirds final salary could send public-sector spending spiralling. Official figures show the government calculates that unfunded promises to pay public-sector pensions amount to £650bn. However, actuaries say the figure is nearer £980bn.

McPhail said: "A minority of private investors are funding their own pension adequately, very often with the help of their employer. For millions of people though, the UK's retirement provision is beginning to resemble a car crash in slow motion."

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