Every now and then it’s interesting to see where the UK’s at with its finances.
So I thought I’d use this week’s post to see how the average UK pension pots are looking. And I found it pretty surprising. I was not only shocked by the average size of pension pots, but also how many people didn’t contribute to any pension at all.
In this post we’ll be looking at private pension data, which means it ignores the impact of any state pension. Within private pensions, there are three main pension types – defined contribution (DC), defined benefit (DB), and personal. Both DC and DB pensions are employer pensions, and personal pensions relate to self-invested personal pensions (SIPPs).
All data is taken from the Office of National Statistics (ONS), and is accurate as of 2022.
If you’d like to have a look into the average salaries in the UK, have a read of this post: ‘Average UK salary by age’. And if you’d like a broader view into the state of the UK’s savings habits, ‘Average savings (UK) by age’.
Contents
Average UK pension pots by age
Average pension pots [UK]:
- Ages 16-24: £2,700
- Ages 25-34: £9,500
- Ages 35-44: £30,600
- Ages 45-54: £81,200
- Ages 55-64: £189,700
- Ages 65-74: £190,000
- Ages 75+: £90,300
- The average is represented here (and throughout this post) using the median. Using the 35-44 age group as an example, if you lined up all the pension pots for people aged 35-44 in the UK from the smallest to the largest, the middle pot would be worth of £30,600. This is the median.
- This means if you’re aged 35-44 and have a pension pot above £30,600, that’s larger than 50% of your age group.
- I was surprised at how low those numbers are. Given the conventional wisdom is that you can safely withdraw 3%-4% of your portfolio per year in retirement, a pot of £190k gives you somewhere between £6k and £8k per year of withdrawals. That’s not much at all if you’re relying solely on your pension to fund retirement. Hopefully those with £190k in their pension pots will also have savings in their ISAs, or other investments outside their pension wrapper (like property).
- These averages are only looking at people who already contribute to a pension. There are plenty of people who don’t contribute to any pension at all:
Percentage of individuals contributing to a pension
Thoughts:
- 55% of individuals don’t have a pension. That’s insane. Pensions are not only free money when employers match contributions, but they’re a hugely tax-efficient way to invest. Although the trend is moving in the right direction thanks to auto-enrolment (the percentage of individuals who had no active pension between 2012 and 2014 was 65%), over half of individuals with no pension is still worrying.
- I’m guessing most of those individuals with no pension are those who can’t afford to contribute to one, rather than those who choose not to, but neither option paints a rosy picture. Hopefully those 55% with no pension are at least saving through ISAs…
- I was also surprised at the percentage of people with defined benefit pensions. Although they’re being phased out, the fact that 18% of individuals are lucky enough to have a DB scheme compared with the 20% who are labouring away under a DC scheme was surprising.
The ‘Average pension pots UK by age’ graph above looks at only those people who have a pension. When we look at the average UK pension pots of everyone – not just those who already contribute to a pension – the state of affairs for UK pensions is even worse:
Thoughts:
- When you look at data for everyone, and not just those who are already contributing to a pension, the numbers are much lower.
- Given around half the population have no pension at all, the average pension pots in the UK are roughly halved when looking at the whole population.
- That brings the average pension size for someone in the 55-64 age bracket from £190k down to just over £100k.
To dig a bit deeper into the stats, the ONS also release data on sizes of average pension pots in the UK by pension type. There’s additional information on percentiles when we break pensions down by type, which gives us a better idea of how pension pot sizes are distributed.
I’ve used data for pensions which are ‘not yet in payment’, which means they’re not having money taken out of them yet. So we’re looking here at accumulators, and not those in drawdown.
Average DC pension pots not yet in payment by age
Average DB pension pots not yet in payment by age
Average personal pension pots by age
How to increase your pension pot without saving more
The obvious way to increase the size of your pension pot is to save more. But that’s not particularly helpful.
So here are a few other ways to boost the size of your pension without having to make additional contributions – and all of which can have a significant impact.
Fees
If you switched from an investment portfolio costing you 2% into one costing you 0.3%, that would result in an extra 92% in your pension pot after 40 years (assuming 5% returns per year).
92%!
That’s a huge increase. You could almost double the size of your pension by doing nothing other than switching to a lower-cost portfolio.
And these numbers aren’t unrealistic either – a discretionary portfolio investing in active funds can easily end up costing 2% per year. And that’s without even considering any IFAs, pension providers, or other intermediaries being involved.
On the low-cost side, a 0.3% portfolio is also easy to put together. Just have a look at my posts on my preferred Vanguard equity funds and bond funds.
Employer match
When I first started out in finance, I remember several of my colleagues opted out of the company pension scheme. It was a good scheme, too – we paid in 3% and our employer paid in 5%.
Now I know not everyone can afford to contribute to a pension, but that wasn’t the case for my colleagues. They were earning a good salary at a large company. By choosing not to contribute, they were turning down free money!
Not only that, they were forgoing the benefit investing early, which has an incredibly powerful impact on your finances later in life.
In the past, it was up to employees to decide whether they wanted to join their employer’s pension scheme or not. But since auto enrolment was introduced in 2012, employers have been gradually required to automatically enrol their staff into a workplace pension scheme.
There is a minimum total amount that has to be contributed by you and your employer. From April 2019, these minimums are 5% from you, and 3% from your employer.
So firstly, make sure your company is complying with auto enrolment.
Secondly, check your employer’s company match. Many companies offer to match your contributions up to a certain limit – many match up to 8%.
Missing pensions
Speaking of free money, there’s over £19 billion that’s been ‘lost’ in forgotten UK pension pots according to The Association of British Insurers (ABI).
Pension pots can be lost when an employee leaves their company, and doesn’t transfer the pension over to their new employer. There’s nothing wrong with doing this, as they still own their pension pot and can still access it when they reach retirement age. But problems can arise if, for example, the employee then moves house, and forgets to notify the old pension provider of the change of address. It can then become very easy to forget about your old company’s pension.
Not only can hunting for old pensions boost your pension pot, by bringing them back from the dead you can ensure what you’re invested in is appropriate for you. And you can also ensure you’re not paying too much, which is hugely important as we’ve seen.
The UK Government has a service for finding contact details for any old pensions, which you can access here.
Make sure it’s appropriate
A final way to improve your pension pot without saving more is to make sure what you’re invested in is appropriate.
You could be missing out on higher returns if you have a high willingness and ability to take risk, yet your portfolio is invested predominantly in bonds. Similarly, if you’re invested in something which is too high risk for your risk profile, then it’s very possible you’ll make some bad investing decisions when the next crash comes, and you’ll hurt your long-term returns as a result.
If you want to learn how to assess your own risk profile, have a read of this post: ‘How do I invest’.
Summary
A point worth remembering for those trying to benchmark themselves against their age group is that personal finances are just that – personal.
The size of your pension pot is completely dependent on your own circumstances and goals.
Someone intending to retire at 35 and spend their retirement cruising the world on their superyacht, sipping Dom Pérignon and eating meals prepared by their personal chef is going to need a pile of gold so large it comes with its own dragon to guard it. So that shouldn’t be the benchmark for someone intending to retire in their late 50s, who wants to travel occasionally, spend time with the grandkids, and take up gardening.
The data presented here on the average pension pots in the UK paints a pretty bleak picture. Pensions are a simple, convenient, tax-efficient way to invest, and even come with the benefit of free money for those contributing to an employer pension scheme. If you have the ability and opportunity to contribute to one, you should seriously consider it.
But the fact you’re reading this blog means you’re highly likely to be in a better financial position than most. An interest in investing puts you ahead of 99% of the population,
For those who want to increase their pension pot, figuring out how to save more is the obvious first choice, but there are several other ways to improve the state of your pension without having to save any additional money.
For those looking to take control of their own investments, this section on The Basics might prove to be a useful starting point. It covers topics including Am I ready to invest?, How much do I need to start investing?, and How do I invest?.
I’m also beginning to flesh out the pension section of this site, with current guides on SSAS pensions and AVC pensions.
[…] Source; Occam Investing […]
Some great research and analysis. Retirement saving is indeed unnecessarily complex – everyone automatically thinks of pensions but the UK tax laws suggest a broader strategy required. Pensions are tax-free on the way in but taxed on the way out wheras other investments are taxed at your nominal rate on the way in but tax-free on the way out. Balancing pension conributions to gain the maximum tax relief against salary then contributing to other investments to gain the tax-free withdrawal option could help to minimise what HMRC try to take back in retirement
The government should provide a NI number at birth and pay £5,000 into a private pension. Compound growth over 60+ years would virtually remove the need for a state pension and provide stability to the UK and personal finances after retirement.
I really enjoyed reading this. It is frightening what systemic problems are on the horizon, autoenrolment has been a good initiative, but we left it late. We will have a generation without a pension, and with parents still alive.
Really concerning data. Particularly, people doesn’t understand the concept of time value of money. The data above shows that people start focusing on pensions at the age of 55 years old, too late to get the maximum benefit of tax free gains (even if you need to pay 55% over the lifetime allowance, you are likely on the money in comparison with paying income tax + dividend tax + capital gain tax during 30 years). It is also worrying that some people that would like indeed to invest in the pension is capped at £4k/yr contribution during the years of [not that high] income, even if in the future they may earn significantly less/be unemployable due to the age requirements of their work
Thanks for this, interesting stats (if a bit concerning for the future). A thought and a question:
1) I suspect the surprisingly high number of people who are still accruing DB pensions might reflect the significant proportion of the population working in the public sector where DB pensions are still the default, even if they’re a bit less generous than they used to be.
2) Did the data indicate how the ONS calculated the notional size of a DB pension ‘pot’? Off the top of my head it could be based on the estimated cost of buying an equivalent annuity from an insurer (although query whether any insurer would in practice offer an annuity with the level of inflation protection and contingent benefits you get in most DB schemes), but that figure might vary a lot from year to year depending on annuity pricing.
1) Yes, I’d hazard a guess that’s the case. I don’t know of any private sector employers generous enough to still over DB schemes!
2) Yes, they calculated the annual DB income members could expect to receive based on length of service, salary, and accrual rate, then figured out how large a pot would be needed to purchase an annuity which matched that income stream, then discounted it to today’s value. So yes, definitely dependent on rates.
Those figures are indeed shocking, and may reflect partly the YOLO consumer society we now all live in combined with the high living costs particularly in cities or just a reticence in handing over large sums for a pension “product”, which judging by the pension mis-selling scandal of the late 80’s and 90’s is probably fully justified. Many young people may have witnessed their parents losing much of their life savings to the likes of Equitable Life, Pru, Abbey Life and RSA, and are themselves now wary of handing over their money to pension
salesmenadvisers. However, unlike then there are now plenty of options for young people to self manage their own pension pots and retirement income (SIPPS and ISA’s) via online platforms, at very low fees as Occam states. There has never been a better time to take complete control of our pension provision.I couldn’t agree more!
Is it that people who are not economically active – people caring for children in the home, for example – are included in this? In some ways it would be more useful to know the household pension pot, rather than by individual.
Also, if the median person receives a retirement pension of £8k, and a state pension of £9k, and they pay no NICs, their post-tax income will be £16k. If the average household has two average people, average retiree household income would be £32k, which would give retirees a higher disposable income than the average household of all ages.
Thank you for writing this post. I am falling out of love with pensions since they can change the age of access. Putting money over and above my employers match isn’t attractive since I can’t access it for so long.
It’s a tricky trade off between the inconvenience of not being able to access your pension for so long, and the tax advantages of contributing to one. I personally prefer to split my investments – each month I contribute some to my pension (over the employer match), and some to my other investment accounts.
It’ll never be the best approach in hindsight, but it won’t be the worst either!