Government says 12.5mn people are under-saving for retirement

In research published by the government on March 3, the DWP said 38 per cent of working age people — equivalent to 12.5mn of the population — are not putting enough money aside for their retirement. 

It noted that this figure was “a large proportion” of the UK, adding that the level of under-saving increases to 43 per cent, or 14.1mn, when the majority of an individual’s defined contribution pension is converted into an annuity.

The government analysis measured people’s pension savings against target replacement rates. It also looked at the Pensions and Lifetime Savings Association’s moderate retirement living standard, which suggested a greater 51 per cent of working people could be under-saving.

The grim reality is that only half of Brits will enjoy a ‘moderate’ standard of living in retirement on current projections

Tom Selby, AJ Bell

Hargreaves Lansdown head of retirement analysis Helen Morrissey said that no matter what way you cut the data, the UK is under-saving. 

“This data looks at measuring adequacy in a variety of ways,” she explained.

“One way is target replacement rates – where you target around two-thirds of your working income in retirement. The PLSA’s retirement income standards are more specific, setting out an actual income you need to target to achieve a minimum, moderate and comfortable lifestyle.”

‘Dim and distant dream’

By target replacement rates, 12.5mn people are estimated to be under-saving, but by the PLSA’s standards, this figure jumps to 17.7mn people who are not saving enough to hit their moderate retirement income standard.

“Achieving a comfortable retirement income seems like a dim and distant dream, with only around 12 per cent of people on track to achieve this,” Morrissey said.

“It looks likely many people are in for a nasty shock as they approach retirement and realise just how much their lifestyle will need to change.”

Morrissey added that pressure continues to build on the government to outline a timetable for the introduction of the 2017 auto-enrolment review reforms.

“Reducing the minimum age and allowing contributions from the first pound will help a lot of people – particularly those on lower incomes,” she explained.

“However, those higher up the income bracket are also under-saving, so we need to look at what else can be done.

“We [also] need to look at how [employees] can be incentivised to put more away. One way this could be done is by encouraging more employers to boost their own contributions if their employees increase theirs – the so-called ‘employer match’.”

An alarm bell for many

Commenting on the data, Damon Hopkins, head of DC workplace savings at consultancy Broadstone, said for all the success auto-enrolment has delivered in vastly increasing pension membership, average DC savings rates fall “well short” of ensuring people will live comfortably in retirement. 

“While the current financial pressures on household budgets suggest mandating higher pension contributions now could be a mistake, it is vital that the government makes higher pension contributions a priority,” he said.

“This, coupled with better innovation and governance around investment strategies, have to be industry priorities to complete the auto-enrolment success story.”

Hopkins said pension savers also need to be clear about what their retirement income is likely to be, given their current rates of saving. 

“For many, it could be the alarm bell they need to reconsider their contributions and/or investment risk so they can achieve the secure and comfortable retirement that meets their aspirations,” he added.

AJ Bell head of retirement policy Tom Selby labelled the fact that only half of Brits will enjoy a “moderate” standard of living in retirement on current projections a “grim reality”.

While those saving enough for a “comfortable” retirement will be a slim minority (12 per cent) of the population.

“There are various interesting ideas out there, including ‘save more tomorrow’, where contributions rise automatically in line with pay increases, and exploring ways to link contribution rises to certain life events,” Selby said.

“But the longer we delay addressing this pensions adequacy challenge, the bigger it becomes. This must include assessing how those excluded from auto-enrolment, including millions of self-employed workers, can be brought into the pensions system.

“Failure to do this will risk creating a two-tier retirement system, with the self-employed left relying on the state pension and not much else in their later years,” he continued.

“[This] analysis also gives valuable context to the debate around retirement saving incentives. The focus must remain on encouraging people to save more for the future, rather than hacking back pension tax relief at every opportunity.”

This article originally appeared on FTAdviser.com