Millions of working age people in the UK could secure a financially comfortable retirement by making only modest changes to their saving habits, new research published today by the Department for Work and Pensions finds.
While government action to transform British pensions has brought about radical improvements to the retirement prospects of future pensioners, millions are still not saving enough to ensure they can maintain their standard of living into old age.
But although 11.9 million people are saving too little, a large number of these are already on the right savings path and could safeguard their financial future by putting away just a little more. The analysis finds that, of the 11.9 million, almost half are at least 80% of the way towards achieving their retirement income target, while only 8 per cent are less than 50% of the way there.
Pensions Minister Steve Webb said:
This coalition government’s sweeping reforms of the pensions system will make a huge difference to the long-term financial prospects of most working age people. But while the state will always provide a decent safety net so people can get by, anyone wanting to see their standard of living maintained into old age needs to make their own provision too.
This new research shows that by saving just a little more, a huge number of working people could make their future retirement so much more comfortable.
Landmark reforms of the State Pension system, work to reinvigorate workplace pension schemes and efforts to help older jobseekers get back into employment are all playing a crucial role in tackling the problem of under-saving, the research finds.
The introduction of the triple lock – the commitment to increase the state pension by whichever is highest out of earnings, prices or 2.5% – has also made a major impact.
But with the government’s pension reforms having had the biggest positive impact on lower earners, the spotlight is now turning to people in middle and higher income groups, who are amongst the worst financially prepared for old age. While the problem exists amongst all income groups, it is people in the middle and higher income ranges who, statistically, now face the biggest income hit when they give up work.
The research document published today sets out the scale of the savings challenge facing the UK, as the average age of the country’s population continues to rise. The number of people classed as under-saving is defined by a replacement rate which measures retirement income as a percentage of working age income.
Other key findings of the research include:
- maintenance of the triple lock guarantee – introduced by the government in 2010 – into future years will prevent the number of under-savers increasing further
- further action to increase employment levels amongst people aged between 50 and State Pension age has an important role to play, as does discouraging people from opting out of workplace pensions
- increasing contributions paid into workplace pensions could have a positive impact on reducing under-saving
On contribution rates, the research includes modelling for how different increases could have an impact on the number of people heading for inadequate retirement incomes.
It finds that higher income groups could benefit significantly from higher contribution rates but recognises the danger that, if set too high, these could prove punitive for lower earners and encourage more people to opt out of workplace pensions entirely.
On this basis, the DWP considers that further work is needed to consider pension contribution rates which strike the right balance between providing improved retirement outcomes for all but do not have a detrimental impact on working life incomes.
Key factors leading to poor retirement income prospects
The new research document builds on work the DWP presented in September 2013 to further explore the factors that impact adequacy of income in retirement. Since the original publication, a number of improvements have been made to measurement methods.
The DWP research highlights 3 key factors leading to poor retirement income prospects.
Not having a full work history
This can result in a reduced entitlement to the State Pension (because of insufficient National Insurance contributions) as well as a reduced capacity for private pension saving. This factor is most typical amongst lower-income groups.
Not contributing to private pensions while in work
This factor is more typical of people in the middle-income groups.
Not contributing enough to private pensions to generate a large enough retirement income
This factor is more typical of people in the higher-income groups.
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