Government highlights ‘chronic’ pension crisis: do you have enough to retire?

More than two-fifths of working-age Brits are under-saving for retirement, equating to 14.6 million people, according to new figures from the Department for Work and Pensions. 

The data found that fewer than 1-in-4 people are on course to hit trade body Pensions UK’s ‘comfortable’ retirement income level, and more than 1-in-10 won’t even reach the ‘minimum’ income level, the trade body found. Self-employed people are particularly affected, with over three million self-employed not saving into pensions.

On top of that, those set to retire in 2050 are on course for 8% less private pension income than those retiring today, even when you factor in that they will have likely been automatically enrolled into a pension for a significant chunk of their working lives compared to their counterparts retiring today thanks to auto-enrolment.

Much of this will be down to the dwindling number of defined benefit (also called final salary) pension schemes over the past few decades. But there are also more worrying trends that emerge from these latest figures.

Just 1-in-4 low earners in the private sector are saving into a pension, and when you introduce Pensions UK’s retirement living standards, almost half of lower earners are expected to struggle to afford some of their basic needs in retirement.

One reassuring thing in the figures is that most people are at least set to achieve the Pensions UK ‘minimum’ retirement living standard. Although the fact that 13% of people are expected to not even reach that level – meaning they could struggle to meet basic living costs in retirement – is a major worry.

Self-employed saving crisis

These figures also show the self-employed face a daunting climb towards a decent standard of living in retirement. Over three million self-employed workers are not saving into any kind of pension, with the Institute for Fiscal Studies also estimating more than half have no private pension savings at all.

While many self-employed workers will have money tied up in business, property or other savings and investments, the past 25 years have seen pension engagement among the self-employed plummet – 60% of those earning £10,000 per year or more were contributing to a pension in 1998, compared with just 20% today, according to the IFS.

The government has revived the Pension Commission to spearhead a wholesale review into the entire UK pensions system to future-proof the retirement prospects of the next generation of retirees. But there is no guarantee substantial reforms will happen soon and there are steps people can and should take now, rather than waiting for the government to intervene.

Five steps pension savers can take to boost their pension

1. Make the most of employer contributions and tax relief

The first thing all employees should do is check to make sure they are opted in to their workplace pension scheme and make the most of their employer contributions and tax relief.

It is vital people make the most of employer contributions, which effectively tops up your pension for free. This will significantly boost your pot over time, particularly as you benefit from tax-free investment returns on your own money and the tax relief top-up. Even small contributions each month can add up. For example, putting away £100 a month, which then gets automatically topped up to £125 a month after tax relief, would be worth almost £52,000 after 20 years, assuming 5% investment growth a year after charges.

2. Check charges and consolidate

Checking which provider your pension pots are held with and what fees they charge is also a solid step. There’s a decent chance many people will have multiple pension pots that they’ve accumulated through various employers too, which can be tricky to navigate. Consolidation of all of those pots with a single provider can come with some significant benefits. Most obviously, a single retirement pot is much easier to track and manage than having various pensions with different providers. You could also benefit from lower costs and charges, increased income flexibility and more investment choice by switching provider.

3. Increase contributions

Saving regularly into a pension as early as possible is the single most effective way to boost your retirement income in the long term. Even small increases in contributions can make a huge difference in retirement, so start by figuring out your budget and prioritising short, medium and long-term savings goals. Once you’ve done that, you should have a clearer picture of your current spending and any spare money you might have to set aside for your financial future.

4. Opt-in

Although it may have been tempting to opt-out of your workplace pension over the past few years to fund rising bills and everyday spending, that should be a last resort and something you try and reverse as soon as possible. Opting out means you won’t get your employer contribution, effectively meaning you’re giving up on free money and voluntarily reducing your overall pay package.

5. Look at Lifetime ISAs

The Lifetime ISA can also be an attractive retirement saving option, for self-employed workers and basic-rate taxpayers saving outside their workplace pension in particular. For most employees a pension will be the best option thanks to the employer contribution on offer. Self-employed workers can’t access that, but are able to save into a Lifetime ISA, earning a bonus equivalent to basic rate tax relief, without the need to pay tax on withdrawals.

Lifetime ISA funds have the flexibility to be withdrawn early – albeit with an exit penalty that means you might get back less than you put in – if your financial circumstances take a turn for the worse. On top of this, income withdrawal is completely tax-free after age 60. Pensions, on the other hand, generally can’t be touched until you reach age 55 (rising to 57 in 2028) and only offer 25% tax free on withdrawal.