The number of people at risk of retiring in poverty has surged to 15.3 million, one of Britain’s largest pension firms has warned, an increase of 1.6 million since 2023.
The UK is facing a deepening retirement crisis, with 39 per cent of those aged 22 to 65 facing a precarious financial future where they are unable to afford some basic needs such as clothing, food and energy bills, according to analysis by the pension firm Scottish Widows.
This is despite a rise inaverage annual pension income from £15,500 in 2023 to £17,200 today, including the new state pension, now worth up to £11,976 a year.
Scottish Widows’ annual retirement report warns that retirement savings are particularly low for those in their twenties, the self-employed and low to medium earners.
The report comes as the government carries out a landmark review into pension savings, which is due to conclude this month.
Industry insiders have sounded the alarm that auto-enrolment, introduced in 2012 to force firms to enter workers into a pension scheme, is no longer enough.
Under the rules workers and employers contribute a combined 8 per cent into a pension scheme, but experts estimate you need to contribute more like 18 per cent to achieve a comfortable retirement.
The Scottish Widows research also highlights the growing disparity between those with generous final salary or defined benefit (DB) pensions, schemes that pay a guaranteed income in retirement and are increasingly rare, and those saving into defined contribution (DC) schemes, where your retirement income depends on how much you and your employer pay in and investment performance.
While 73 per cent of those with a DB pension are on track for a comfortable retirement, it’s only 30 per cent for those in DC schemes. Some 4 per cent of those in DB schemes are set to not have enough for a minimum lifestyle, but for savers in DC schemes it’s 20 per cent.
Pete Glancy from Scottish Widows said the government’s pension review must urgently address three key issues: “Auto-enrolment, self-employed contribution rates, and housing, considering both home ownership and affordable housing.”
How much do you need?
How much you need in retirement depends on the lifestyle you want. The Pensions and Lifetime Savings Association (PLSA), an industry body, has guidelines on how much is needed to achieve a minimum, moderate or comfortable retirement.
Assuming you own your home with no mortgage, a minimum retirement lifestyle requires a post-tax income of £14,400, it said. This would provide about £50 a week for groceries, £25 a month on restaurants and a week’s holiday in the UK each year. Couples would need £22,400 between them to achieve the same standard of living. These amounts can include the state pension.
A moderate lifestyle requires £31,300 a year after tax — enough for about £55 a week on groceries and £30 on eating out, a long weekend break in the UK plus a two-week holiday in a destination such as the Mediterranean each year. Couples would need £43,100 a year.
For what the PLSA calls a comfortable retirement, which includes £70 a week on food and £40 on meals out, plus a four-star Mediterranean holiday and three long weekends away in the UK each year, a single person would need £43,100 a year, and a couple £59,000.
Why auto-enrolment is not enough
The problem is that while auto-enrolment has got more people saving — the proportion of employees paying into a workplace pension has gone from 48 per cent in 2011 to 80 per cent in 2023, according to the Department for Work and Pensions — the minimum requirements mean they are still not saving enough.
Mike Ambery from the pension firm Standard Life said: “Auto-enrolment has brought millions into pension saving, however the minimum contribution level could create an illusion of security when in reality it is not enough for most people to achieve anything more than a basic standard of living in retirement.”
Under auto-enrolment, all workers aged between 22 and state pension age and earning at least £10,000 a year are put into their company pension scheme. As a minimum the employee contributes 5 per cent of their salary and the employer 3 per cent, for a total of 8 per cent.
However, it excludes the self-employed and many low earners or part-time workers who do not earn above £10,000 a year. It also risks leaving behind lower earners who earn just above the minimum, whose contributions may not be enough.
How much to save
Assuming you get the full new state pension and had no mortgage or rent to pay, to achieve a minimum lifestyle in retirement you would need an additional income of £2,884 a year before tax. If you wanted to do this using an annuity, an insurance product that pays an income for life, at today’s prices you would need a pension pot of £36,000.
Someone who began working at 22 and retired at 68 (the state pension age for everyone by 2046), contributing the minimum 8 per cent through their working life, could build a pot of £210,000, according to Standard Life. This means you can easily achieve that target based on the PLSA’s present standards.
However, to achieve the PLSA’s after-tax income for a moderate lifestyle of £31,300 a year you would need an additional £24,010 before tax, which would require a pot worth £289,000 — this would require total pension contributions of at least 11 per cent a year.
To reach the £43,100 after-tax income needed for a comfortable retirement you would need an extra £38,914 a year before tax, which would require a pot worth £467,000. This would require contributions of about 18 per cent.
• State pension increase in April 2025: How much payouts are rising this year
These estimates assume a starting salary of £25,000, 3.5 per cent annual salary growth and 5 per cent annual investment growth after charges. Inflation of 2 per cent a year has been factored in, meaning that whenever you reached age 68, the pot should have about the same spending power as today.
While this makes it seem like most people will achieve the minimum lifestyle with pension contributions of 8 per cent, it assumes they will have no housing costs in retirement.
In reality almost a third of people expect to still pay rent or a mortgage after retirement age, according to the insurer Phoenix Insights. To cover the average UK rent of £15,984 a year and still achieve minimum lifestyle you would need a pension pot of £228,000 — requiring contributions of 9 per cent.
For a moderate retirement while paying the average housing costs you would need a £479,000 pot and contributions of 19 per cent. For a comfortable retirement you would need £657,000 and contributions of 25 per cent, according to Standard Life.
How to catch up
If you are in your mid thirties and contributing the minimum 8 per cent, increasing your contributions to 13 per cent could take you from a minimum retirement to a moderate one. A total of 23 per cent would take you from the moderate level to comfortable, according to Standard Life.
If you are in your mid forties, then increasing to 15 per cent would get you a moderate retirement, and 30 per cent would fund a comfortable lifestyle.
In your mid fifties you would need to increase your contributions to 20 per cent for a moderate retirement and 48 per cent to be comfortable.
