Nearly 1 in 4 over 40s without private pension

The research, which aimed to gauge how people are planning for retirement, showed that while most people had started saving for retirement, a significant minority had not.

The DWP noted that in general, many people have low levels of engagement with their pensions.

Of the 2,655 40 to 75 year olds included in the survey, 16 per cent had not yet started saving for retirement at all. 

Not being able to afford to make contributions was the most common reason given for this (cited by 53 per cent of people without a pension).

In a perfect world, people would have started saving into a pension in their twenties Will Hale, Key chief executive

Among the proportion that had started saving, knowledge of how much income they would have in retirement was low. Only 23 per cent said they had a “very good idea” of what they had accumulated.

The DWP said: “The question of whether and how people are planning for retirement is becoming ever more important as people live longer and have greater freedom over when and how they retire and take their pensions.”

The research also sought to find out what would make it easier for people to continue working later in life and identified flexibility as the key factor. 

As it stands, 14 per cent of those aged 66-70 remain in employment, along with 5 per cent of those over 70 years of age.

Proportion of 40-75 year olds in paid work, by age

Source: Planning and Preparing for Later Life 2020/21

Base: All respondents (n=2,655)

Most respondents (62 per cent) who had not yet reached retirement said they planned to work beyond their ideal retirement age, with the consensus being that the ability to work flexibly with fewer hours would support them in achieving this.

Equity release rises in popularity

Elsewhere in the research the DWP noted that people may be relying too heavily on sources other than pensions to fund their retirement.

Nearly half (45 per cent) of all private pension holders expected less than half of their retirement income to come from their private pensions.

The rise in popularity of equity release in particular, as a means of funding retirement, was evident in the results.

FTAdviser has previously reported on concerns around the quality of advice given to people releasing equity from their homes to fund their retirement.

Research from the Lang Cat earlier this year showed an annual shortfall in pensioners’ income in the UK of £48bn in 2020 and 2021. 

At the time, experts said consumers would likely look to equity release to make up the gap.

The research released by the DWP showed that 26 per cent of non-retirees said they would use equity release to fund their later life, compared to 6 per cent of current retirees.

Commenting on the DWP research, equity release provider Key’s chief executive, Will Hale said it was “entirely understandable” that the department would be concerned about people relying too heavily on sources other than pensions to fund their retirement.

“In a perfect world, people would have started saving into a pension in their twenties and made regular contributions – topped up by their employer – until they retire.

“However, this is simply not possible for many people who move roles, take time out of the workplace to have children, prioritise homeownership or find that challenges such as unemployment or illness mean that regular contributions are just not sustainable,” Hale said.

He also noted that contributing more to a pension is “probably not going to be a priority for many” given the current inflationary environment and cost of living crisis. 

“While equity release is not right for everyone, it provides increasing numbers of people with the flexible support they need in retirement.

“In an imperfect world, we need to ensure that people take all their assets into account when planning their retirement as ultimately this results in more retirees achieving what they want and need – without having to look for state support,” Hale said.

Other forms of retirement income also saw an increase in popularity.

64 per cent of non-retirees expected to use savings and investment to fund their retirement compared with 53 per cent of those already retired.

While 22 per cent of non-retirees said they would use income from an inheritance. This compared to 15 per cent of those who were already retired.

Self-employed worst off

The research also highlighted that self-employed people were less likely to have started saving for retirement and were more likely to expect to work beyond the retirement age of 66.

The DWP said saving for retirement presents a challenge for self-employed people because of greater potential fluctuations in income and fewer options for retirement savings.

Only 65 per cent of self-employed respondents said they had a pension.

Of those who said they expected to retire later, the majority said it was for financial reasons but also because they enjoyed the flexibility their self-employment provided.

Pension freedoms

Elsewhere, the research asked respondents about their response to pension freedoms and showed that many people had taken advantage of the system to access their savings before the state retirement age. 

The pension freedoms legislation, which came into force in 2015, allows savers to flexibly access their defined contribution pension from the age of 55 and use the funds for a wider range of options, including cash withdrawal, retirement income products or a combination of the two.

Based on the DWP’s research, nearly everyone (92 per cent) who had taken a lump sum since its introduction said they were happy with the decision. 

More than half (66 per cent) said they were “very satisfied” with their decision.

However the DWP noted: “Whether this will change over time, as people experience the consequences of having cashed in some or all of their pension, will need to be reviewed."

jane.matthews@ft.com