Millions of UK employees are on track for inadequate retirement incomes, according to new research from the Institute for Fiscal Studies (IFS).
The study, part of the Pensions Review conducted in partnership with the abrdn Financial Fairness Trust, has shown that 30 per cent to 40 per cent of private sector workers saving in defined contribution pension schemes may fall short of standard income benchmarks in retirement.
The alarming findings highlight the urgent need for reforms to the UK’s pension system.
Despite the success of automatic enrolment in increasing uptake in workplace pensions, significant challenges remain as most workers make low contributions. There are less than half of private sector employees saving more than eight per cent of their earnings into a pension.
More needs to be saved into private pension plans to achieve expected or minimum incomes and living standards in retirement, the IFS concluded.
This is because longer life expectancy at older ages, lower earnings growth and lower returns to saving are more than offsetting the positive effects of a more generous flat-rate state pension in seeking to provide satisfactory income levels in retirement.
Jamie Jenkins, director of policy at Royal London, describes the situation as a “ticking time bomb” with serious societal and economic implications.
Jenkins said: “The Government’s review of the pensions landscape is a crucial inflection point, and a rare opportunity to put us on a different trajectory; one that gives people confidence for the future and sets us on a more sustainable path for the economy over the long term”.
The IFS proposed a targeted approach to help employees save more during periods when they are better able to do so, to put as part of the Pensions Review.
The policy suggestions to address the retirement savings challenge include:
By providing a minimum three per cent employer contribution regardless of employee contributions, the proposal could benefit the 22 per cent of private sector workers who currently opt out or are not automatically enrolled.
Expanding the age range for automatic enrolment to 16-74 would help more people save for retirement throughout their working lives.
The suggestion to increase default contributions for those on average incomes and above targets additional savings where they may be more affordable.
Raising the upper limit on qualifying earnings and indexing key parameters to earnings growth would future-proof the system.
Implementing these suggestions would boost retirement incomes up to £2,100 per year for those currently on track for low and middle incomes in retirement. But it would only reduce the take-home pay of lower earners by a small amount, the research stated.
Gary Smith, Financial Planning Partner at Evelyn Partners said: “Every saver needs to think individually about what income they need or want in retirement and set about a savings plan to achieve that based on their life circumstances.
“While we would always urge savers to err on the generous side when estimating what size pension pot they will need, those who are due to have no housing costs when they finish work and a substantial inheritance will have drastically different needs to someone for whom the opposite applies.
“Although in some cases inheritances do fail to appear and it can sometimes be risky to rely on them.
“Retirement lifestyle ambitions are often determined in part by financial realities, but it might be that some savers are simply not interested in new cars and expensive holidays, and that will have an impact on what income is adequate for them.
“Some might want to leave a substantial inheritance, while for others this might not be a factor: if someone is happy to run their pension pot right down in their later years, rather than withdraw only amounts that will leave a significant amount at death, this will reduce how much they need to save in the accumulation phase.”