The increase in the cost of living threatens to derail the progress of auto-enrolment, an expert has said.
Hargreaves Lansdown’s savings and resilience barometer showed a rise of 0.5 percentage points in the number of households on track for a moderate retirement income.
Some 42.7 per cent of households will have the necessary retirement income to achieve a moderate standard of living, which is £20,800 a year for a single person, and £30,600 for a couple.
This is an increase from 42.1 per cent in 2019, according to HL.
However, this figure is expected to “plunge” to 38.4 per cent next year.
The cost of living has risen in the past few months as inflation has soared, most recently hitting 9.4 per cent in the 12 months to June.
That has led to £3.9bn of discretionary income disappearing, with the average household seeing their spare cash fall 12.1 per cent.
The average household now has £135 less to spend on non-essential items each month, according to data insights firm Retail Economics and money app HyperJar.
The increase in retirement resilience is still too low, but it is a positive sign that auto-enrolment is doing its job, said senior pensions and retirement analyst at Hargreaves Lansdown, Helen Morrissey.
“The very mechanism that makes pensions a good bet for retirement planning -leaving the money invested until at least age 55 – means they can’t be accessed to meet short-term needs,” she said.
“This may work well most of the time but when you face a cost-of-living crisis, as we currently are, then people are in a very difficult position.”
Of households in the top income quartile, 71.9 per cent are on track to hit the target of a moderate retirement income, with just 11.7 per cent of those in the lowest income quartile on course to have a moderate standard of living in retirement.
This leaves pension policy in a tricky spot, Morrissey said.
“As we can see, current contributions are not enough to cover a moderate income in retirement,” she said, adding that this suggests many have opted to stick close to minimum contribution rates rather than boost them further.
“Hiking minimum contributions would result in people saving more for their retirement but the trade-off is looking at what happens to their financial resilience today, particularly for lower earners.”
The solution, Morrissey said, is to do more work to help people increase their contributions on a voluntary basis when they afford them, instead of mandating higher contributions.
Hargreaves Lansdown’s savings and resilience barometer is developed in partnership with Oxford Economics and measures the financial resilience of the nation every six months.
sally.hickey@ft.com
