- More than two-fifths (43%) of working-age Brits are under-saving for retirement, equating to 14.6 million people, according to DWP figures released last week
- Fewer than 1-in-4 people are on course to hit trade body Pensions UK’s ‘comfortable’ retirement income level...
- ...and more than 1-in-10 won’t even reach the ‘minimum’ income level
- Over three million self-employed are not saving into pensions
- The Pension Commission will attempt to tackle the retirement under-saving crisis
- What steps can you take to ensure you’ve got enough in retirement?
Tom Selby, director of public policy at AJ Bell, comments:
“There’s no escaping the fact that a chronic retirement under-saving crisis looms over the UK pensions system in its current form, and the latest government stats make for suitably grim reading.
“Over two-fifths of working-age Brits are currently under-saving for retirement, equating to 14.6 million individuals. On top of that, those set to retire in 2050 are on course for 8% less private pension income than those retiring today, even when you factor in that they will have likely been automatically enrolled into a pension for a significant chunk of their working lives compared to their counterparts retiring today.
“Much of this will be down to the dwindling number of defined benefit pension schemes outside of the public sector over the past few decades. But there are also more worrying trends that emerge from these latest figures.
“Just 1-in-4 low earners in the private sector are saving into a pension, and when you introduce Pensions UK’s retirement living standards, almost half of lower earners are expected to struggle to afford some of their basic needs in retirement.
“If there’s anything mildly reassuring about the figures, most people are at least set to achieve the Pensions UK ‘minimum’ retirement living standard. Although the 13% of people expected to not even reach that level – meaning they could struggle to meet basic living costs in retirement – are a major worry.
“Fewer than 1-in-10 people are currently saving enough to achieve a comfortable retirement, according to the Pensions UK standards. Without pension saving rates increasing quite dramatically, the vast majority of people retiring in the 2050s will be kissing goodbye to even some of the more modest luxuries included by Pensions UK in its definition of a comfortable retirement.”
Self-employed saving crisis
“Unsurprisingly, these figures also show the self-employed face a daunting climb towards a decent standard of living in retirement. Over three million self-employed workers are not saving into any kind of pension, with the Institute for Fiscal Studies also estimating more than half have no private pension savings at all. While many self-employed workers will have money tied up in business, property or other savings and investments, the last 25 years have seen pension engagement among the self-employed plummet – 60% of those earning £10,000 per year or more were contributing to a pension in 1998, compared with just 20% today*.
“In essence, all signs are pointing to a nation that will be ill equipped to retire in any way comfortably by the middle of this century, if not sooner. More needs to be done to ensure savers, particularly lower earners and the self-employed, can retire with a decent standard of living, rather than scraping by on the state pension alone.
“The government has revived the Pension Commission to spearhead a wholesale review into the entire UK pensions system to future-proof the retirement prospects of the next generation of retirees. But there is no guarantee substantial reforms will happen this side of the general election and there are steps people can and should take now, rather than waiting for the government to intervene.”
What can pension savers do to solve this?
- Make the most of employer contributions and tax relief
“The first thing all employees should do is check to make sure they are opted into their workplace pension scheme and make the most of their employer contributions and tax relief.
“It is vital people make the most of employer contributions, which effectively tops up your pension for free. This will significantly boost your pot over time, particularly as you benefit from tax-free investment returns on your own money and the tax relief top-up. Even small contributions each month can add up. For example, putting away £100 a month, which then gets automatically topped up to £125 a month after tax relief, would be worth almost £52,000 after 20 years, assuming 5% investment growth a year after charges.”
- Check charges and consolidate
“Checking which provider your pension pots are held with and what fees they charge is also a solid step. There’s a decent chance many people will have multiple pension pots that they’ve accumulated through various employers too, which can be tricky to navigate. Consolidation of all of those pots with a single provider can come with some significant benefits. Most obviously, a single retirement pot is much easier to track and manage than having various pensions with different providers. You could also benefit from lower costs and charges, increased income flexibility and more investment choice by switching provider.”
- Increase contributions
“Saving regularly into a pension as early as possible is the single most effective way to boost your retirement income in the long term. Even small increases in contributions can make a huge difference in retirement, so start by figuring out your budget and prioritising short, medium and long-term savings goals. Once you’ve done that, you should have a clearer picture of your current spending and any spare money you might have to set aside for your financial future.”
- Opt-in
“Although it may have been tempting to opt-out of your workplace pension over the past few years to fund rising bills and everyday spending, that should be a last resort and something you try and reverse as soon as possible. Opting out means you won’t get your employer contribution, effectively meaning you’re giving up on free money and voluntarily reducing your overall pay package.”
- Look at Lifetime ISAs
“The Lifetime ISA can also be an attractive retirement saving option, for self-employed workers and basic-rate taxpayers saving outside their workplace pension in particular. For most employees a pension will be the best option thanks to the employer contribution on offer. Self-employed workers can’t access that, but are able to save into a Lifetime ISA, earning a bonus equivalent to basic rate tax relief, without the need to pay tax on withdrawals.
“Lifetime ISA funds have the flexibility to be withdrawn early – albeit with an exit penalty that means you might get back less than you put in – if your financial circumstances take a turn for the worse. On top of this, income withdrawal is completely tax-free after age 60. Pensions, on the other hand, generally can’t be touched until you reach age 55 (rising to 57 in 2028) and only offer 25% tax free on withdrawal.”
About the data
DWP’s latest data assesses the adequacy of future pension incomes based on individuals’ target replacement rates (TTRs) – a percentage of pre-retirement earnings that someone would need to replace to meet a sufficient income level in retirement – and comparing pension income with the PLSA’s retirement living standards (RLS).
There are 33.6 million individuals included in the analysis when measuring adequacy using TRRs and 34.8 million when using PLSA RLS. This will be less than the current population aged between 22 and the state pension age as some individuals are excluded from the analysis.
The analysis looks at two scenarios: ‘all income’ and ‘income after lump sum’. The ‘all income’ scenario reflects the entire pension pot being converted into an annuity and is the preferred metric for the headline figures. The ‘income after lump sum’ scenario reflects an individual taking their 25% tax-free lump sum from their pension with the remainder being converted into an annuity. When measuring under-saving using TRRs, ‘before housing cost’ (BHC) and ‘after housing cost’ (AHC) income is used – with BHC being the preferred metric for the headline figures.
