Falling investment returns mean we all need to pump an extra £1,000 into our pensions each year to get the retirement we want.
Research from Money Mail and consultancy firm McKinsey & Company predicts that the “golden age” of big stock market returns is coming to an end.
As returns shrink, people aged 30 and over will see their pension pot growth stall, leaving them with less than they hoped for when they retire.
How things have changed
Figures show that, since 1984, the average pension pot has returned 6.7% a year after charges.
This means that someone who has saved £200 a month into their pension for the past two decades would have a pot worth around £98,000 today.
McKinsey & Company doesn’t believe that level of growth is sustainable.
The consultancy firm predicts that average returns will be just 3.4% a year over the next 20 years.
Someone saving £200 would end up with just £68,700 over the same period, Darius McDermott, director of broker Chelsea Financial Services, told Money Mail.
"The implications are serious and these numbers should serve as a wake-up call to savers, who need to realise it may not be as easy to make returns in the future," he said.
The difference amounts to a massive £30,000 pension black hole, between the growth we’ve come to expect and what our pensions may return over the next two decades.
Why will investment growth slow?
[SPOTLIGHT] McKinsey & Company says that stock markets have performed well over the past 30 years due to falling inflation and lower interest rates.
These golden economic circumstances have helped blue chip companies boost their profits. Stock market giants have also benefitted from the growing wealth amongst China’s new middle classes.
But growth will slow over the next two decades as the global economy slows down, according to the report.
“The big North American and Western European firms that took the largest share of the global profit pool in the past 30 years face new competitive pressures as emerging market companies expand, technology giants disrupt business models and smaller rivals compete for customers,” says McKinsey & Company’s analysis.
How to avoid a pension gap
If you want to avoid a pension shortfall when you retire you have a number of options.
First, and most obvious, is to invest more into your pension if at all possible to address the threat of slower growth.
The McKinsey & Company report states that you would need to save an extra £1,000 a year in order to make up the shortfall.
Finding an extra £86 a month may not be easy though.
An alternative may be to consider delaying your retirement so you have more time to save a sizeable pension pot. A survey by Prudential last month found that 55,000 people aged 55 to 64 were considering pushing back their retirement.
Another option is to make sure your pension savings are working as hard as possible with minimal fees and charges eating away at your returns.
Take a look at your pension investments and research alternatives. It might be that you decided to change a couple of your expensive active managed funds for trackers in order to reduce your costs.
Consider rebalancing your portfolio so you aren’t overly exposed to one particular asset class or geographic region.
A well diversified portfolio gives you protection against dips in one area and also exposure to more chances for growth.