Pension savers have been warned they could “rely on government support in later life” due to a lack of other pension benefits.
Around 14 million people are not on track for their expected retirement incomes, with many facing a savings shortfall of more than £100,000, new research shows.
Around seven-in-ten (71 per cent) of UK adults agree that the government should come up with a plan to increase the minimum pension contribution rate if it is too low for most people to get an income to live on in retirement, new research from the Phoenix Group found.
When asked what an ‘adequate’ retirement income is, the top answer from adults in the UK was an income level where ‘basic needs are covered with some money left over for non-essentials’.
Since the introduction of auto-enrolment on 1 October 2012, more than 10 million people are quietly putting money away for the future or saving more for the first time.
Under automatic opt-in, employees join a defined contribution pension scheme with a statutory minimum contribution level (from employer and employee combined) of eight per cent per annum.
The DWP is giving more than £11,500 to pensioners on the full new state pension
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However, saving at this level is unlikely to provide enough funds for most people to meet their retirement expectations, the report said.
Catherine Foot, director of Phoenix Insights, the Phoenix Group’s longevity think tank, said: “Auto-enrolment has been successful in triggering retirement savings for millions of people, but the current minimum contribution rate is too low for most savers to achieve an adequate retirement income and perhaps for some it gives a false sense of security.
“We need a government plan to increase contributions and help tackle the pension savings gap, as part of a wider review of the pension system to ensure it helps people save enough and be more financially secure in the long term.
“Delays and inaction could leave generations of future pensioners unable to enjoy the lifestyle they had hoped for when they retire or struggling financially, while millions more reliant on government support later in life.”
Around 14 million people, or half of defined contribution pension savers, are not on track for their expected retirement income. Those who haven’t saved enough won’t just be slightly off track, with more than two-thirds (68 per cent) of this group facing a savings shortfall of more than £100,000, the Phoenix Group’s longevity think tank Phoenix Insights suggested.
More than a quarter (27 percent) of non-pensioners believe that the minimum contribution rate for self-enrolment is too low. Of this group, half (51 percent) think the minimum contribution should be increased to at least 12 percent, and a fifth (20 percent) think it should be increased to at least 15 percent.
Not all savers are the same, they will have their own expectations and requirements when it comes to visualizing their pension.
The triple lock in the state pension acts as a key hedge against the rising cost of living after retirement. With a significant increase of 8.5 per cent to just over £11,500 for the full new state pension a year from April 2024, it remains a significant foundation of pension income.
Similarly, someone on the full rate of basic state pension will receive £169.50 each week, £8,814 during the 2024/25 financial year.
However, Britons have been warned that they could rely on this support because the funds from auto-enrolment will not adequately provide for the lifestyle they need.
In the latest update, the cost of the minimum pensioner’s standard of living has risen from £12,800 to £14,400 for a single person and from £19,900 to £22,400 for a couple. A minimum standard of living for retirement covers all one’s needs, with something left over for entertainment.
With the minimum retirement living standard higher than the full new state pension, Britons are being urged to take control of their retirement planning and ensure they are earning enough in their other pension funds.
Some employers will pay more into someone’s occupational pension if they agree to increase their own contributions as well.
This is known as “contribution matching”. This could help people build their retirement savings faster – but each person should be sure they can afford to pay more.
Gail Izat, executive director of workplace pensions at Standard Life, part of the Phoenix Group, said: “More needs to be done to help people secure a decent standard of living in retirement, and increasing minimum contributions is the most powerful mechanism available.
“While it is important that we act when the time is right for both savers and employers, prolonged inactivity risks continuing undersaving and the UK entering a retirement savings crisis.
“It is clear that people support action to increase minimum contributions if the current rate is not adequate, and we encourage the next government to carry out a review.”