A study by the Department for Work and Pensions has found that more than 12 million people face inadequate retirement incomes because they are not saving enough. Caroline Lindsay finds out more.
Millions of people are not saving enough for the income they are likely to want in retirement. Life expectancy in the UK is increasing but people are saving less into pensions. Half of these are high earners who are not saving enough into private pensions and face an “income shock” on retirement.
The DWP report shows that the highest earners will have to delay retirement by around eight years unless they sharply increase their saving.
Around one million are currently on course for a retirement income of less than half the sum they would like. Almost 400,000 of today’s higher-earning workers on more than £35,400 a year will end up among the poorest 20% of pensioners, the research suggests.
In order to have a decent quality of life, a worker earning £20,000 needs to save £1,260. But those earning £40,800 must save £5,260 a year.
“People want the same sort of standard of living when they retire as when they were working but unless you are putting a significant amount by, you could face a significant drop in your standard of living,” said Steve Webb, the pensions minister. “It’s tempting to think that not saving enough is just a problem for people on modest incomes, but it goes all the way up the income ladder.
“We found some of the people who will have spent their working lives at the top of the scale could spend their retirements at the bottom if they don’t do something about it.”
Back in 2002 an independent Pensions Commission was established to consider the long-term challenges facing the UK pension system.
It identified a number of areas for reform, including undersaving for retirement, the complexity of the state pension system stopping people from making informed decisions about whether, when and how much to save, inequalities in the pension system and the need to ensure that the system remains fair between the generations and sustainable, the State Pension age should rise to reflect increases in life expectancy.
More than 10 years later and current complex pensioner payments are still making it difficult for anyone to predict what income they will receive in retirement. Also, a significant decline in occupational pension saving since the 1970s threatens to change the outlook for future generations of pensioners.
To help people save for their retirement the government wants workplace pensions to be affordable for employers and attractive to workers and aims to help people maintain their standards of living in retirement. To achieve this, it has announced a new State Pension and introduced automatic enrolment into workplace pensions.
Other pension reform policies include changing the way people save through workplace pensions to encourage many more people to save for their retirement (automatic enrolment), improving workplace pensions by raising standards and clarifying outcomes so people can save more with confidence, and reviewing the State Pension age to make sure the State Pension is affordable in the long term and fair between generations.
Plans include introducing a simple, single-tier pension to help people understand what they need to save for their retirement, removing outdated and complex elements of the current State Pension system.
In the meantime, there are a number of things individuals can do to improve their future retirement incomes: having a full working history, saving while in work and saving more.