Large numbers of Brits face a retirement “cliff edge” as widespread failure to save leaves most unable to achieve a moderate or comfortable standard of living.
Just nine per cent of Brits are on track to reach the annual income of £45,400 required for a comfortable retirement for a single person, according to the latest retirement living standards report from Pensions UK.
A comfortable retirement allows an individual to afford luxuries and hobbies such as dining out, a new car and foreign holidays without financial stress.
Only 23 per cent of Brits are expected to reach the £32,700 annual income required for a moderate lifestyle, while a minimum lifestyle would cost £13,900 per year.
Over 80 per cent are on track for only a minimum lifestyle, highlighting an ongoing pension saving crisis in which many Brits are failing to capitalise on auto-enrolment.
All three income measures have increased over the past year, reflecting higher costs for essential items as well as social activities.
Zoe Alexander, executive director of policy and advocacy at Pensions UK, said: “That is out of step with what people expect for their future.”
Alexander added: “Without action, too many risk facing a cliff-edge drop in income when they stop work. The Government is right to be considering whether minimum contributions need to rise through the work of the Pensions Commission.”
Workers can increase their auto-enrolment contributions beyond the legal minimum of eight per cent, with employers required to pay at least three per cent and employees contributing the remaining five per cent.
The revitalised Pensions Commission is currently examining whether income thresholds and contribution rates for auto-enrolment may need to be adjusted, with many pension experts considering the current standards insufficient.
Alexander encouraged workers to speak to their employers about saving above the minimum, saying this could help “bridge the gap” until higher savings levels are set in legislation.
The commission is due to release its final recommendations next spring, following an interim report that outlined the challenges of an ageing population and how weak wage growth has stifled retirement savings.
Work and Pensions Committee Chair Debbie Abrahams called on the government to do more to raise awareness of the adequacy gap, particularly amid the rising state pension age.
Abrahams said: “The Government needs to undertake an awareness raising campaign to ensure that individuals and employers are all aware of how big the current gap is.”
She warned that the shortfall in pensions would become more acute for those approaching retirement as the state pension age rises, “leading to stress, ill health and isolation in too many cases.”
Craig Rickman, personal finance expert at Interactive Investor, questioned why tax incentives are being reduced during a savings crisis, describing recent policy proposals as “puzzling.”
Rickman cited the inheritance tax reforms set to take effect next year and salary sacrifice being scaled back in 2029 as measures that risk disincentivising savers at a time when support is most needed.
Quilter’s calculations suggested that achieving a comfortable retirement would require a pension pot of £691,000, with the firm warning that tax changes may make pension saving less attractive.
Jon Greer, head of retirement policy at Quilter, said: “The current policy landscape, including the never-ending threat of further pension tax changes at each budget, have made things increasingly confusing for savers.”