Ian Neale explains just what to expect from the average pension pot.

Sounds like a lot of money, doesn't it, 30k as a lump sum? A terrific win on the gee-gees or the lottery, perhaps; but hardly a big pension pot.

In fact, it's officially downright trivial: a scheme pension valued at no more than GBP 30,000 can be commuted as a trivial lump sum, subject to terms and conditions of course.

Quite a few dependent's pensions, in particular, are in line for cashing out on this basis.

GBP 30,000 is also the Government's chosen threshold for requiring independent advice to be obtained by members seeking to transfer 'safeguarded benefits' to a money purchase arrangement.

If the benefits are worth more than 30k, on the prescribed valuation basis, extra care must be taken before flexible access can be allowed.

So it seems that GBP 30,000 is the level at which a pension fund begins to look worthwhile, officially speaking. But what will that buy you?

Sixteen years ago, annuity rates had fallen to the point where a GBP 30,000 pot (the average pension pot used to buy a Compulsory Purchase Annuity in 1999) bought a 65-year old male, a level single life pension of around GBP 2,600 per year.

Not exactly riches; and yet today, GBP 30k is barely enough to buy GBP 1,600 per year.

You might say that 70 or even 75 is the new 65 as the age to retire – if you can stay in work that long; but even a 75-year old with a GBP 30k pot will struggle to exchange it for more than GBP 2,200 per year – unless they are already in poor health.

Notta lotta money.

The writing is on the wall: If we want to supplement our state pension even to reach half our salary when we retire (forget two-thirds; that was last century), pension saving will have to ramp up massively.

For most people, because most people working in the private sector haven't even got to GBP 30,000.

According to figures published by the ABI, the average pot size used to purchase an annuity in Q2 2015 was GBP 54,500, a 42% increase from Q2 2014 when it was GBP 38,400.

However, averages are often heavily skewed by a small number of very large outliers, so the median – the value below which 50% of the population lies – is often a more meaningful measure.

The arrival of flexibility in 2015 has made it less easy to identify the median pot size used to purchase an annuity; in Q2 2014 though (the last period for which the ABI has published a figure), it was just GBP 25,600.

That converts today to a level single-life annuity of barely GBP 1,350 – less than GBP 26 per week.

Reversing the arithmetic is really frightening. For all sorts of reasons, the average age at which people leave the workforce is unlikely to rise far above 65; but let's be optimistic and say 68.

Current life expectancy for today's 68-year old male is about 89.

Being generous again, let's suppose they get a state pension worth GBP 8,000 pa, and their final salary corresponds to average earnings, about GBP 26,000 pa.

To get a total starting pension of half this figure – GBP 13,000, less than the national minimum wage by the way, will require a top-up of GBP 5,000 pa. A level single-life annuity could easily cost close to GBP 90,000.

And that's without accounting for the effect of inflation: to buy an RPI-linked annuity starting at GBP 5,000 pa would cost nearly twice as much.

So what's thirty grand in the real world? How long would that last, as a lump sum?

We can argue about the all-important assumptions, and about how realistic or otherwise it is to expect people to put their hand in their pocket and suddenly start saving massively more.

What's not in doubt is the substantial drop in income facing today's workers when they no longer have a job. Years ago, when it was compulsory to purchase an annuity from a money purchase scheme at retirement, it used to be described as a 'cliff-edge' experience.

Those were the days: annuity rates have fallen by nearly 40% since the millennium. The good news today is you don't need to jump off the cliff; you have freedom and choice.

But you still need the money. Without a long-term plan, retirement will be a 'sink-hole' experience.

Ian Neale,Director, Aries Insight.