It’s no secret that many Britons do not save enough to live off in retirement.
The bad news is that the number of people falling into that category is rising.
The annual retirement report published today by Scottish Widows, the life company, reveals that the percentage of people not on track for even a minimum retirement lifestyle has risen from 35% to 38% during the last year.
That equates to an extra 1.2 million people.
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The Pensions and Lifetime Savings Association (PLSA) defines a minimum retirement lifestyle as covering all the needs of a retiree “with some left over for fun and social occasions” – a holiday in the UK, a meal out once a month and “affordable leisure activities about twice a week”.
It estimates the cost of such a lifestyle to be £14,400 for a single retiree or £22,400 for a retired couple.
The PLSA assumes retirees qualify for a full state pension, which rose to £11,500 a year at the start of the current tax year, with retirees currently qualifying for the state pension at the age of 66. This is due to rise to 67 between May 2026 and the end of 2028.
The report, based on interviews in March and April with 5,072 people saving for retirement and deemed to be representative of the UK population, suggests that most people would like retire at the age of 62 but just over half, 54%, think they will have to work longer than they would like – on average by seven years.
Just over a quarter of those quizzed, some 27%, said they don’t feel they will ever be able to retire.
The report also spells out in stark detail the extent to which retirees depend on the state pension. Just over half of those questioned, some 54%, expect the state pension to eventually form “a meaningful portion of their retirement income”, with three quarters calling it “hugely important” in helping them pay for everyday necessities.
Just under one in eight people – some 12% – are worried it will not be available to them by the time they retire. That may reflect concerns that the state pension age may rise further in coming years – something that has proved incendiary in countries like France.
The insurer says the increase reflects a growing number of workers struggling to save more at a time of rising costs.
It found that just over two in five – some 42% – of future retirees felt able to save anything for retirement after covering day to day costs. That is mainly due to higher rent and mortgage payments.
The report, the 20th from Scottish Widows, will raise concerns that the UK is facing a retirement crisis.
This is not to say great strides have been made in the last couple of decades.
Auto-enrolment, a policy of Tony Blair’s government and implemented by the coalition government in 2012, was a huge success in getting more people into a workplace pension. It required every employer to set up a workplace pension scheme into which all employees aged 22 or over and on an annual salary of more than £10,000 would be automatically enrolled unless the worker specifically asked to opt out.
The big surprise was that fewer workers than expected chose to opt out. It means 79% of workers are now in an occupational pension scheme – up from just under half when auto-enrolment came in.
What is becoming clear, though, is that contributions are not high enough.
The minimum contribution currently stands at 8% of a worker’s salary – of which companies must pay at least 3% and employees 5%. The PLSA would like to see this raised to 12% – split equally between employers and employees – but the new government’s Pensions Bill, published in last week’s King’s Speech, failed to include this measure.
That is not the only reason, though, why so many Britons face having to work longer than expected.
Gordon Brown’s tax raid on pensions shortly after he became chancellor in 1997 did lasting damage to what was previously Europe’s strongest and best-financed occupational pensions system.
It is estimated to have drained at least £250bn from pension schemes in the subsequent 20 years and hastened the demise of ‘defined benefit’ (sometimes known as ‘final salary’) pension schemes in the private sector.
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These schemes, where the employer and not the employee, bore the risk of there not being enough to meet a worker’s retirement needs, exist now largely only in the public sector. They were replaced by ‘defined contribution’ (sometimes known as ‘money purchase’) schemes where the employee, not the employer, bears the risk of not having saved enough.
It is perhaps no coincidence that the age group highlighted by Scottish Widows as most at risk of not being able to cover their basic needs in retirement are those workers – aged between 60 and 64 – closest to retirement.
Two in five of these workers, born between 1960 and 1964, would have been heading towards their earnings peak just when Mr Brown launched his raid.
As the Scottish Widows report notes: “They are less likely than the previous generation to have benefited from generous defined benefit pension schemes.”
Other factors have also contributed, including regulation, which has pushed a bigger proportion of retirement savings out of equities and into supposedly less risky bonds. That has undoubtedly hit investment returns and especially after bond prices fell when inflation took off around the world in 2021.
It also helps explain why the proportion of the UK stock market that is owned by UK pension funds has slumped – sparking a drive by the last government to improve the City’s competitiveness.
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Yet politicians like Mr Brown, Mrs May and Mr Johnson are not solely to blame for the shortfall in retirement savings.
People are living longer and, accordingly, will need more retirement savings in future to maintain living standards.
As David Fairs, a partner at pension consultants LCP, puts it in the report: “We have not made progress in adapting our pension system to the modern world. The three stages of our lives – education, work and retirement used to divide neatly into thirds, but this is no longer the case.
“We can’t save enough in a working life of 40 years to retire for 20-25 years.
“We change jobs, move between full time, part time, employed, self-employed and unemployed. We marry, divorce and remarry. The retirement system needs to adapt.”
The good news is that, for most workers, there is still time to plan ahead and still time to save more.
That is particularly the case for the UK’s youngest workers.
One of the last acts of Rishi Sunak’s government was a change to the law so that employers will, in future, have to automatically enrol workers into their pension scheme at the age of 18 rather than 22.
Employers will also no longer be allowed to disregard the first £6,240 of an employee’s earnings when calculating how much to contribute into their scheme – potentially increasing the sums invested on behalf of the lowest-paid workers.
Meanwhile the new government is promising that the Pensions Bill it published last week, which largely takes on the previous government’s work, will raise the value of the average saver’s pot by 9% – some £11,000 – over the course of their career.
All of this is a step in the right direction.
Ultimately, though, it will be no substitute for raising the sums saved by us all.