Pensions problem: Retirement crisis fears resurface as sufficient savings collapse | Business News

It’s no secret that many Brits don’t save enough to live on in retirement.

The bad news is that the number of people who fall into this category is increasing.

The annual retirement report published today by Scottish Widows, the life company, reveals that the percentage of people who are not on track for a minimum retirement lifestyle has increased from 35% to 38% over the last year.

This is equivalent to an additional 1.2 million people.

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The Pensions and Lifetime Savings Association (PLSA) defines a minimum retirement lifestyle as covering all the needs of a retiree “with some left over for fun and social occasions” – a holiday in the UK, a meal out once a month and “accessible leisure activities about twice a week”.

The cost of this lifestyle is estimated to be £14,400 for a single pensioner or £22,400 for a retired couple.

The PLSA assumes that retirees qualify for a full state pension, which increased to £11,500 per year at the start of the current tax year, with retirees currently qualifying for the state pension at age 66. 2026 and end of 2028.

The report, based on interviews carried out in March and April with 5,072 people saving for retirement and considered representative of the UK population, suggests that the majority of people would like to retire at 62, but just over half, 54% , they think they will have to work longer than they would like – on average seven years.

Just over a quarter of those surveyed, about 27%, said they don’t feel they will ever be able to retire.

The report also explains in detail the extent to which retirees depend on the state pension. Just over half of those surveyed, around 54%, expect the State pension to eventually make up “a significant part of their retirement income”, with three-quarters considering it “extremely important” in helping them pay for necessities daily.

Just under one in eight people – around 12% – are worried that it won’t be available to them when they retire. This may reflect concerns that the state retirement age could rise further in the coming years – something that has has proven to be incendiary in countries like France.

The insurer says the increase reflects a growing number of workers struggling to save more at a time of rising costs.

It was found that just over two in five – around 42% – of future retirees felt able to save something for retirement after covering day-to-day costs. This is mainly due to increased rent and mortgage payments.

The report, the 20th from Scottish Widows, will raise concerns that the UK is facing a pensions crisis.

This is not to say that great advances have been made in recent decades.

Automatic enrollment, a policy of Tony Blair’s government and implemented by the Coalition government in 2012, was a huge success in getting more people into occupational pensions. It required all employers to establish a workplace pension scheme, into which all employees aged 22 or over and with an annual salary of more than £10,000 would be automatically enrolled unless the worker specifically requested exclusion.

The big surprise was that fewer workers than expected chose to leave. It means that 79% of workers are now on an occupational pension scheme – up from just under half when automatic enrollment came into being.

What is becoming clear, however, is that contributions are not high enough.

The minimum contribution is currently 8% of the worker’s salary – of which companies must pay at least 3% and employees 5%. The PLSA would like this figure to be increased to 12% – split equally between employers and employees – but the government’s new pensions law, published in last week’s King’s Speech, did not include this measure.

That’s not the only reason why so many Brits are faced with working longer than expected.

Gordon Brown’s pensions tax operation shortly after he became chancellor in 1997 caused lasting damage to what was previously Europe’s strongest and best-funded occupational pensions system.

It is estimated to have drained at least £250 billion from pension schemes over the subsequent 20 years and accelerated the demise of “defined benefit” (sometimes known as “final salary”) pension schemes in the private sector.

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These schemes, where it was the employer rather than the employee who ran the risk of not having enough resources to meet the employee’s retirement needs, now largely exist only in the public sector. They have been replaced by “defined contribution” schemes (sometimes known as “money purchase”) where the worker, not the employer, runs the risk of not having saved enough.

It is perhaps no coincidence that the age group highlighted by Scottish Widows as being most at risk of not being able to cover their basic needs in retirement are workers – aged between 60 and 64 – closest to retirement.

Two in five of these workers, born between 1960 and 1964, would be heading toward peak earnings just as Mr. Brown launched his operation.

As the Scottish Widows report notes: “They are less likely to have benefited from generous defined benefit pension schemes than the previous generation.”

Other factors also contributed, including regulation, which pushed a greater proportion of retirement savings out of stocks and into supposedly less risky bonds. This has undoubtedly affected investment returns, especially after bond prices fell as inflation soared across the world in 2021.

It also helps to explain why the proportion of the UK stock market owned by UK pension funds has fallen – triggering an initiative by the last government to improve the city’s competitiveness.

However, politicians like Brown, May and Johnson are not the only ones to blame for the shortage of retirement savings.

People are living longer and will therefore need more retirement savings in the future to maintain living standards.

As David Fairs, partner at pensions consultancy LCP, says in the report: “We have made no progress in adapting our pensions system to the modern world. The three phases of our lives – education, work and retirement used to be neatly divided into thirds, but this is no longer the case.

“We cannot save enough over a 40-year working life to retire for 20-25 years.

“We change jobs, we alternate between full-time, part-time, employed, self-employed and unemployed. We get married, divorced and remarried. The retirement system needs to adapt.”

The good news is that for most workers, there is still time to plan ahead and still time to save more.

This is particularly the case for younger workers in the UK.

One of the last acts of Rishi Sunak’s government was a change in the law so that employers will in future have to automatically enroll workers into their pension scheme at age 18, rather than age 22.

Employers will also no longer be able to disregard the first £6,240 of an employee’s earnings when calculating how much they should contribute to their scheme – potentially increasing the sums invested on behalf of lower-paid workers.

Meanwhile, the new government promises that the Pensions Bill it published last week, which largely picks up the work of the previous government, will increase the value of the average saver’s pot by 9% – around £11,000 – over their lifetime .

This is all a step in the right direction.

Ultimately, however, it will not replace the increased sums saved by all of us.