Pension savers are cautioned that they might have to depend on state support in later years due to insufficient pension income from other sources.
Recent research indicates that approximately 14 million individuals are not on track to achieve their anticipated retirement income, with many facing a shortfall exceeding £100,000.
A survey by Phoenix Group reveals that 71 percent of UK adults believe the government should devise a plan to raise the minimum rate of auto-enrolment pension contributions if current rates are insufficient for a comfortable retirement.
When UK adults were asked about what constitutes an ‘adequate’ retirement income, the prevailing response was an income that covers basic needs with some surplus for discretionary spending.
Since the introduction of auto-enrolment on October 1, 2012, over 10 million individuals have started saving for retirement for the first time or have increased their savings.
Under the automatic enrolment system, employees are enrolled in a defined contribution pension scheme with a combined statutory minimum contribution (from employer and employee) of eight percent annually.
The Department for Work and Pensions (DWP) is providing over £11,500 annually to pensioners receiving the new full state pension.
However, the report suggests that saving at this level is unlikely to suffice for most people to meet their retirement expectations.
Catherine Foot, Director of Phoenix Insights, the Phoenix Group’s longevity think tank, stated, “Auto-enrolment has successfully initiated retirement savings for millions, but the current minimum contribution rate is insufficient for most savers to achieve a satisfactory retirement income and might provide a false sense of security.
“A government plan to increase contributions is essential to address the pension savings gap and overhaul the pension system to ensure people are saving adequately for long-term financial security.
“Delays and inaction could result in future generations facing financial difficulties in retirement, with many relying on state support.”
Approximately 14 million individuals, half of defined contribution pension savers, are not on track to meet their retirement income goals. More than two-thirds (68 percent) of this group face a savings gap exceeding £100,000, according to Phoenix Insights.
Over a quarter (27 percent) of non-pensioners believe the minimum auto-enrolment contribution rate is too low. Within this group, 51 percent think the minimum contribution should be raised to at least 12 percent, and 20 percent believe it should be increased to at least 15 percent.
Retirement expectations and requirements vary among savers.
The state pension’s triple lock is a vital safeguard against rising living costs for pensioners. With an 8.5 percent increase to just over £11,500 for the new full state pension from April 2024, it remains a crucial component of retirement income.
Similarly, individuals receiving the full Basic State Pension will get £169.50 weekly, totaling £8,814 annually for the 2024/25 financial year.
Despite this, Britons are warned they might still need to rely on state support as auto-enrolment savings may not suffice for their desired lifestyle.
The cost of a minimum standard of living for pensioners has risen from £12,800 to £14,400 for a single person and from £19,900 to £22,400 for a couple. This standard covers all essential needs with some extra for leisure activities.
Since the minimum standard of living pension exceeds the new full state pension, Britons are encouraged to take charge of their retirement planning and ensure they accumulate enough in other pension funds.
Some employers offer higher contributions to workplace pensions if employees agree to increase their contributions, a practice known as ‘contribution matching,’ which can accelerate retirement savings. However, individuals must ensure they can afford the higher contributions.
Gail Izat, Managing Director of Workplace Pensions at Standard Life, part of the Phoenix Group, emphasized, “More must be done to help people secure a good standard of living in retirement, and increasing minimum contributions is the most effective step available.
“While it is crucial to act when the time is right for both savers and employers, prolonged inaction risks perpetuating under-saving and leading the UK into a retirement savings crisis.
“It is clear that there is public support for increasing minimum contributions if current rates are inadequate, and we urge the next government to undertake a review.”