Millions of people in Britain risk falling off a financial cliff edge when they retire. The Pensions Commission warned last month that at least 15 million people are not saving enough for post-work life – and now new research has found that fewer than one in ten of us will be able to afford a “comfortable” retirement.
How bad is the problem?
A “minimum retirement lifestyle” now costs £13,900 a year for a single person or £22,500 for a couple, according to the latest calculations by the Loughborough University’s Centre for Research in Social Policy for trade body Pensions UK. A “moderate” lifestyle costs £32,700 or £45,400, and a “comfortable” lifestyle costs £45,400 or £62,700.
Given that the state pension is roughly £12,550 a year, about 82% of the current working population are putting aside enough to be able to reach the minimum retirement lifestyle. But only 23% will reach the moderate, and a tiny 9% will enjoy a comfortable one. “That is out of step with what people expect for their future,” said Zoe Alexander of Pensions UK.
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There is also a significant gender difference in private pension savings, often due to women working fewer hours and earning less. Women aged 55 to 59 have a median pension wealth 48% lower than men of the same age, according to Office for National Statistics figures published by the Department for Work & Pensions.
And even those who have saved a fair whack are leaving themselves short by electing to access their private pensions at the “earliest possible opportunity”, said The Pensions Commission. People in their mid-50s often raid their pension pots to spend the money on a car, a holiday or home renovations. This will obviously reduce their pension income when they come to retire.
Why aren’t we better prepared?
It seems many of us have got a bad case of “present bias”: retirement is decades away but current expenses are immediate, so we prioritise today’s bills, housing costs, childcare or debt payments over distant future needs.
In addition to the people who could save for retirement but don't, there are those who just can’t. For some, “it is simply impossible to save any more” because “you can’t save money you don’t have”, Matt Padley from the Loughborough University research team, told The Telegraph.
The growth of the gig economy is playing a part here. Historically, pension schemes were designed around long-term employment, leaving freelancers, contractors and the self-employed to make their own arrangements. Automatic workplace pension enrolment became mandatory in 2018 but often excludes gig workers or those on part-time wages. Just 4% of self-employed workers are saving for retirement, according to The Pensions Commission, with even lower levels of saving among the younger self-employed.
Pension planning can also seem daunting, with a complicated array of investment choices, tax rules, contribution rates, annuities, drawdown options, and changing regulations to navigate. Many people don’t understand the system or feel overwhelmed when they try to find out.
People don’t fail to prepare for retirement because they consciously choose poverty in old age but because the benefits are distant, the choices are complex, and the system often requires active, knowledgeable effort.
What can be done to improve things?
The scale of the problem has led to calls for the government to raise the legal minimum employers must put into staff pensions under automatic enrolment. The statutory minimum workplace pension contribution is 8%, with 5% coming from the employee, and 3% from the employer. Pensions UK is encouraging people “to speak to their employers” to see if they can “support them to save above the minimum” by also increasing the rate of “their matching pension contributions”.
The Pensions Commission will be making its recommendations early next year. But it has already flagged that, to address the pensions gender gap, there would need to be reforms to pensions policy and the labour market, including improving access to childcare, an issue which disproportionately impacts mothers’ ability to work and save more.
More broadly, policies that address general affordability issues would help households where failure to save for retirement is driven not by choice but by financial necessity. Policies that improve wages, reduce excessive debt burdens or lower living costs could indirectly improve participation in both workplace and private pension schemes.
