Good morning. I am going to whisper this gently so you don’t get spooked back under the duvet – there is a good chance that you are one of at least 15 million Britons not saving adequately for retirement. That is according to a report published this week by the Pensions Commission.
The pensions “cliff edge” is no longer a distant warning; for many, it is becoming a reality. As the cost of living continues to bite, the dream of a comfortable retirement is being replaced by a pragmatic – and often scary – calculation of how long one might have to stay in the workforce. And many of us, it seems, are getting our numbers wrong.
Why has this happened and is the problem getting worse?
In recent years, there has been a shift away from “defined benefit” schemes – the gold-standard final salary pensions of previous generations, where you were guaranteed a set income for life after retirement – to “defined contribution” schemes. This has caused major problems for retirement planning. In most modern schemes, you can only get out of your pension pot what has been put in, along with any interest that has accrued.
As wages have stagnated and housing costs have swallowed a larger share of take-home pay, the “surplus” cash required to top up a private pension has simply evaporated for many households. With the state pension currently topping out at £241.30 a week, private pensions are vital.
“That’s the tragedy of auto-enrolment,” Paul Lewis concludes. Minimum contribution levels are set at levels to make the schemes affordable for employers. “It’s a great idea, and it’s much better than having nothing, but it’s simply not enough. These funds will be enough to keep you off means-tested benefits, which is good news for future governments, but they won’t be enough to live on in any decent way.”
Why are we neglecting our pension pots?
“There is a rule of thumb,” Lewis says, “that you should save a percentage of your income equal to half the age you were when you started saving. If you start at 20, 10% of your income a year until you’re 70 might be OK. If you start at 50, you’d need to save 25% a year. Personally, I think those figures actually underestimate what is required.”
Anderson raises the cost of living in our conversation. She notes that if people are paying into a pension, they are locking that money away until they are at least 55. “For a lot of people, they need as much money as they can get right now.”
Lewis concurs. “It’s very easy for me to say ‘put more in’, but if you’re saving for a mortgage, buying food for children, or commuting, there’s often nothing left. That is the worry. The arithmetically ‘good’ advice is almost impossible for many people to follow.” According to the Resolution Foundation, the poorest working-age families have seen their incomes fall by £1,800 per year since 2021-22.
Still, Anderson tells me she is particularly surprised at the low number of self-employed people contributing to a pension scheme. “For the self-employed, saving into one is much more tax-efficient because you get tax relief. To put it simply: if you put £10,000 of your earnings into a pension, the whole lot goes in (subject to allowances). If you took that as income, you’d be paying tax and national insurance; if you’re a higher-rate taxpayer, you could lose almost 50% of it. It’s just a way of saving tax-efficiently for the future.”
What should you be doing?
Lewis offers the slightly impractical advice of going back in time and starting to save earlier, which, it must be said, isn’t particularly comforting. Especially at my age when I’d need to go back to the last century to adjust spending habits sufficiently to counteract the amount of money I foolishly frittered away in my youth.
There is a wealth of advice out there. Sandra Haurant wrote for us that people shouldn’t panic during turbulent times, and should prioritise sticking with paying into their pension. She advises that you should resist opting out of your work’s pension scheme, and instead consider contributing extra where you can. In many schemes, greater personal contributions trigger an increase in those from your employer. For the self-employed, a stakeholder pension – a retirement plan with capped annual charges and a minimum monthly contribution of £20 – is well worth considering.
The government-backed MoneyHelper website has a section dedicated to advising people on pensions, with the chance to make appointments to speak to an expert, a calculator to help you work out what you can afford to pay and what you can expect to receive, and clear explanations of what types of pension there are.
And, if you want to give your finances an entire overhaul, at the turn of the year our money and consumer editor Hilary Osborne, among others, put together this list of 26 apps and tools to help with your money planning.
What should the government be doing?
In publishing its interim report, pensions commissioner Jeannie Drake said: “The recommendations we present in our final report will address the need to secure adequate income in later life and a pension system that is fit for decades to come.”
Lewis suggests that real reform will be a tough sell to UK businesses. “It is almost impossible to contemplate making employers pay more right now because they have so many extra costs and businesses are struggling. I don’t see that happening politically in the near future.”
The report offers an interim conclusion to government, suggesting ministers face a brutal three-way choice: hike taxes to fund a growing elderly population, force both individuals and employers to cough up significantly higher contributions, or further hike the retirement age (for Britain’s younger workers, the state pension age is due to rise to 68). It is an unenviable “pick-your-poison” scenario for any politician, but with four in 10 people currently under-saving, “doing nothing” isn’t an option.
For now, it’s on us. “The first easy step for most people,” Anderson says, “is just to find out exactly how much you have.”
“If people check, they might have a pleasant surprise, especially if they’ve been paying in for a long time and compound interest has helped it grow. The earlier you start, the more time it has to compound.”
