In research published by the government today (March 3), DWP said 38 per cent of working age people - equivalent to 12.5mn of the population - are not putting enough money aside for retirement.
DWP noted that this figure was “a large proportion” of the UK, adding that the level of undersaving increases to 43 per cent, or 14.1mn, when the majority of an individual’s defined contribution (DC) pension is converted into an annuity.
The government analysis measured people’s pension savings against target replacement rates, or ‘TRRs’.
It also looked at the Pensions and Lifetime Savings Association’s (PLSA) moderate retirement living standard, which suggested a greater 51 per cent of working people could be undersaving.
The grim reality is that only half of Brits will enjoy a ‘moderate’ standard of living in retirement on current projections.Tom Selby, AJ Bell
Hargreaves Lansdown’s head of retirement analysis, Helen Morrissey, said no matter what way you cut the data, the UK is undersaving.
“This data looks at measuring adequacy in a variety of ways,” Morrissey explained.
“One way is target replacement rates – where you target around two-thirds of your working income in retirement.
“The PLSA’s retirement income standards are more specific, setting out an actual income you need to target to achieve a minimum, moderate and comfortable lifestyle.”
By TRRs, 12.5mn people are estimated to be undersaving, but by the PLSA’s standards, this figure jumps to 17.7mn people who are not saving enough to hit their moderate retirement income standard.
“Achieving a comfortable retirement income seems like a dim and distant dream, with only around 12 per cent of people on track to achieve this,” said Morrissey.
“It looks likely many people are in for a nasty shock as they approach retirement and realise just how much their lifestyle will need to change.”
Morrissey added that pressure continues to build on the government to outline a timetable for the introduction of the 2017 auto-enrolment review reforms.
“Reducing minimum age and allowing contributions from the first pound will help a lot of people - particularly those on lower incomes,” she explained.
“However, those higher up the income bracket are also under-saving so we need to look at what else can be done.
“We [also] need to look at how [employees] can be incentivised to put more away. One way this could be done is by encouraging more employers to boost their own contributions if their employees increase theirs – the so-called ‘employer match’.”
Commenting on the data, head of DC workplace savings at consultancy Broadstone, Damon Hopkins, said for all the success auto-enrolment has delivered in vastly increasing pension membership, average DC savings rates fall “well short” of ensuring people will live comfortably in retirement.
“While the current financial pressures on household budgets suggest mandating higher pension contributions now could be a mistake, it is vital that the government makes higher pension contributions a priority,” said Hopkins.
“This, coupled with better innovation and governance around investment strategies, have to be industry priorities to complete the auto-enrolment success story.”