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UK state pension ranked worst in OECD

British pensioners relying on the government can expect a lower percentage of their working salary as retirement income than those from any other country in the OECD.

The Organisation for Economic Cooperation and Development (OECD) study calculated that a typical British worker will at retirement receive a state pension and other benefits worth around 29% of what they had previously been earning. That compares with an average of 63% in other OECD countries, and more than 80% in Italy and the Netherlands. The report said this expected “net replacement rate” will be the lowest of any OECD country.

The report released by the organisation reveals future retirees in the UK will receive 26% of their pre-retirement income from the state pension and other mandatory schemes. The study used the net replacement rate, a ratio of disposable income before and after retirement, which takes into account personal income taxes and social security contributions. This ‘replacement rate’ is the lowest in the OECD, and significantly below the 63% average across the 35 countries – highlighting the dependence of British workers on private pensions. This is thought to be largely responsible for the 18.5% of people aged 75 and over living in poverty in the UK, compared with 11% among the country’s whole population, with women most affected.

The reason for the UK falling to the bottom of the league table is down to the earnings-related element of the state pension being removed along with the introduction of the new flat-rate pension, the OECD said. It means UK retirees who fail to make their own pension provision face a steep income drop when they retire compared with other OECD countries.By contrast the average worker across the OECD can expect 63 per cent of their salary as a state funded pension.

“People who have had sufficient income during their working lives to save, buy their own home, and contribute to private pensions, have relatively good incomes compared to younger generations,” the report says. “However, retirees without such additional sources of revenue are left with few resources – this is reflected in the poverty rate and high income inequality in the UK.” The report also suggested that the pension freedoms and the rigidity of the state pension, which cannot be accessed until people reach a certain age, could increase inequality in the UK. It said recent changes enabling older people to withdraw chunks of cash from their retirement pots could lead to further inequality “as not all will be able to finance retiring earlier”. It warned that “individuals may be inclined to spend the lump sum early, or underestimate their life expectancy through the drawdown period, leaving them with limited resources at very old age”.

A Department for Work and Pensions (DWP) spokesman said: “We have taken decisive action to address our changing population through a new, generous state pension, retaining the triple lock and protecting the poorest through pension credit, reducing pensioner poverty close to historically low levels. “But there’s always more to do. Thanks to automatic enrolment, around 11 million people will be newly saving or saving more into a workplace pension by 2018.”


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