Around 38 per cent of working-age people, equivalent to 12.5 million, are undersaving for retirement when measured against their pre-retirement earnings.
The Department for Work and Pensions found that ‘there is still a large proportion of the population undersaving for retirement if individuals want to maintain a certain standard of living’ in its most recent report titled Future Pension Incomes, which was published today.
The data examines various methods of gauging income sufficiency, including the PLSA’s Retirement Income Guidelines and target replacement rates (TRR), which are typically two-thirds of working income.
Higher earners are more likely to be undersaving in comparison to pre-retirement earnings, the study revealed. Around 14 per can of people in the lowest income bracket (making less than £14,500 in gross pre-retirement income annually) are undersaving, compared to 55 per cent of those in the highest income bracket (earning more than £61,500 annually). A lower earner’s target income will include a bigger share of state pension.
According to one other method of gauging the sufficiency of pension income, the Retired Living Standards of the Pension and Lifetime Savings Association, close to 12 per cent of persons of working age are undersaving for retirement. This increases to 51 per cent and 88 per cent when comparing against the PLSA Moderate and Comfortable RLS.
When comparing savings rates to the PLSA RLS, lower earnings are more likely to be undersaving. It is anticipated that 34 per cent of those in the lowest income bracket will fall below the PLSA Minimum Level, compared to only 3 per cent of those in the highest income bracket.
Broadstone head of DC workplace savings Damon Hopkins says: “These figures are yet another reminder of the major pension savings adequacy challenge that the nation faces.
“Millions face a challenging retirement landscape, especially given the rise in State Pension Age and growth of economic inactivity due to long-term sickness among older workers forcing many into an earlier retirement.
“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. This, coupled with better innovation and governance around investment strategies, have to be industry priorities to complete the auto-enrolment success story.
“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 re-consider their contributions and/or investment risk so they can achieve the secure and comfortable retirement that meets their aspirations.”
Hargreaves Lansdown head of retirement analysis Helen Morrissey says: “Measuring retirement income adequacy is a tricky business but, no matter what way you cut the data, we are under–saving. This data looks at measuring adequacy in a variety of ways. 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.
“Whatever way you look at it, it looks fairly gloomy. If you look at target replacement rates after housing costs, 13m people are estimated to be under–saving. If we measure against the PLSA standards, we have 17.7m or 51 per cent of people who aren’t 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. 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.
“The good news is that, over time, levels of under–saving are meant to reduce due to a combination of state pension increases and spending more of your working life contributing to a pension through auto-enrolment. However, the levels remain high -around a third (31 per cent) of people retiring in the 2060s are not expected to meet their target replacement rate income and 45 per cent of people won’t hit the PLSA’s moderate income target, so it is clear there is still much to be done.
“Pressure continues to build on the government to outline a timetable for the introduction of the 2017 Auto-enrolment review reforms. Reducing minimum age and allowing contributions from the first pound will help a lot of people -particularly those on lower incomes. However, those higher up the income bracket are also under–saving so we need to look at what else can be done.
“When auto-enrolment was introduced, the idea was that employees would contribute over and above minimum levels to boost their incomes, but it is clear this isn’t happening. We need to look at how they 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’. Auto-enrolment has done a great job in getting more people saving but this is only the start of the journey. Without further reform, we are still a long way away from many people having a decent retirement income.”
Evelyn Partners director of financial planning Gary Smith says: “Mainly that huge numbers still aren’t saving enough towards their retirement, and it particularly shows that middle and higher earners with defined contribution pensions are likely on retirement to see the biggest shortfall when compared to the income they were receiving in work.
“It does suggest that minimum contribution levels, within workplace pension arrangements, might have to increase further in order to make sure people are saving adequate amounts, and won’t be caught out by a living standards shock when they retire.
“This analysis takes a current look at the pension savings market, and I remain concerned that rising energy, food and borrowing costs might force many into opting out of their workplace pension arrangements, as they seek to make their incomes cover the essentials, creating an even greater shortfall in pension savings amongst those that probably require it the most.
“The report should also be a stark reminder to the Chancellor, ahead of his upcoming Budget statement, that any attempts to reduce the tax-efficiency benefits of pension schemes in an effort to chase revenue could result in more savers opting out or pension savings, thus creating a generation who will be very much reliant upon the state to provide their income in retirement.”