Work another six years or face a significant pension shortfall, index suggests

UK savers need to add six years to their working life or face large pension shortfall as there is a mismatch between desired and potential retirement age, new research suggests.

The AXA Wealth Pension Index also shows that unprotected pension affordability has fallen 40% in five years and it warns of the perils of having an unprotected pension portfolio in times of market volatility.

To highlight many of the issues facing the UK's future pensioners, AXA Wealth has developed a new quantitative index measuring affordability and volatility in retirement saving, and has conducted consumer research which suggests a significant disparity between desired, expected and actual retirement ages.

The AXA Wealth Pension Index shows that a typical male pension saver wanting to retire on a similar pension income to that which they would have achieved five years ago will now need to work for an additional six years and one month, making his pension affordability age 71.1 years old.

The male index shows that pension affordability has fallen by almost 40% since the end of 2005 and the average male saver who chooses to go ahead and retire today would face a pension of just over half what they could have obtained five years ago.

The index also indicates that females fare even worse than their male counterparts. The female pension affordability age now stands at 71.3 years, n additional six years and four months, and the index also shows a decline of 40% in the potential realisable pension annuity.

Pension affordability as calculated by the index has improved in the last 18 months. The projected retirement age hit a high of 75.8 for men and 76.1 for women in March 2009. However, AXA Wealth has warned savers not to become complacent in securing their financial futures.

‘Due to significant market volatility in recent years, pension savers face a significant shortfall in retirement income or a much later retirement age. In the longer term equity markets continue to offer the potential for creating enhanced retirement incomes, but it's clear that this needs to be afforded some form of protection in periods of extended volatility as we have experienced in the period under investigation. People insure their homes and other valuable assets, but not their financial future,’ said Mike Morrison, head of pensions development, AXA Wealth.

‘Flexibility at retirement is a great idea, but flexibility that can take advantage of an upturn in the market with a guarantee of capital or income, might be even better,’ he added.

The AXA Wealth Pension Index results contrast with the outcome of a primary consumer research survey also conducted by AXA, which found that the UK public's desires and expectations in relation to retirement age differ greatly from reality.

The average age that people in the UK would like to retire at is 58. The average age that people in the UK expect to be able to afford to retire at is 64 . The index tells us that the average age that people will be able to afford to retire at is 71.2.

Based on this and the Pension Index data there is a desire reality gap of 13 years and an expectation reality gap of seven years. ‘This first quarterly analysis highlights the stark contrast between retirement dreams and reality,’ said AXA’s Michael Gregg.