Many working age people in the UK could secure a financially comfortable retirement by making some small changes to their saving habits, according to new research published by the Department for Work and Pensions (DWP). 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 – estimating that 11.9m people in the UK need only to make modest changes to safeguard their financial future.
The research finds that landmark reforms of the State Pension system, working to reinvigorate workplace pension schemes and efforts to help older job-seekers get back into employment, are all playing a crucial role in tackling the problem of under-saving. 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.
Of the 11.9 million people who 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.
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. 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 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 without having a detrimental impact on working life incomes.
The DWP research highlights three key factors leading to poor retirement income prospects:
> Not having a full work history 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, which is more typical of people in the middle-income groups.
> Not contributing enough to private pensions to generate a large enough retirement income, which is more typical of people in the higher-income groups.
The research document 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.
The DWP research concludes that:
> the 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.