2 days ago
Savers risk falling £700k short of a comfortable retirement
Britons are facing a £700,000 pension shortfall as the cost of a comfortable retirement rises, analysis shows.
An earner on an average salary of £35,000 starting out in the jobs market today would need a pension pot of nearly £1.2m in 40 years' time to be able to retire comfortably, according to the Pensions and Lifetime Savings Association (PLSA), a trade body.
However, with 8pc pension contributions – the Government's minimum auto-enrolment level for private sector workers – employees will be left with a retirement nest egg of just £460,000, leaving a deficit of £740,000.
This shortfall has risen by £100,000 from £640,000 last year due to an increase in the estimated cost of affording a comfortable retirement.
Under auto-enrolment rules, employees put at least 5pc of their salaries into a pension, in addition to a minimum 3pc employer contribution and government tax relief.
But experts have warned that Britain faces a 'pension savings crisis' as the current minimum contribution level is not enough to fund adequate retirements.
The figures are based on data from the PLSA showing that a single person who owns their own home will need an annual post-tax income of £43,900 for a 'comfortable' retirement this year, up from £32,800 in 2020.
A 'comfortable' retirement, defined by the PLSA, includes £150 a week to spend on groceries and meals out, £1,500 a year for clothing and footwear, and an annual fortnight-long four-star holiday in the Mediterranean.
The same worker would need a pension pot of £729,000 to achieve a more modest standard of living in retirement, with a smaller budget for household bills, food, holidays and property maintenance.
But pension contributions equal to 8pc of their salary would still leave them with a £270,000 deficit when they come to retire.
The analysis assumes 5pc investment growth net of fees, and 2pc growth in yearly contributions and inflation.
Industry insiders expect the Government to examine auto-enrolment rules in stage two of its Pensions Investment Review. Chancellor Rachel Reeves has previously considered copying aspects of Australia's far more generous pension contribution system which would force employers to pay more into employees' pots.
By 2040, the incomes of almost three million pensioners will no longer be enough to cover their needs, according to separate analysis by the PLSA.
The Conservatives have warned that the Chancellor's plans to push pension funds into investing more in Britain will leave retirees 'worse off' in retirement by failing to make investment growth a priority.
Ian Cook, chartered financial planner from Quilter Cheviot, said: 'Far too many people are sleepwalking into a retirement that may fall well short of the lifestyle they hope for.
'Auto-enrolment has been a real success in getting people saving, but it's increasingly clear that the current framework may no longer be fit for purpose if we want people to build up the kind of pension pots they'll truly need.'
Myron Jobson, of Interactive Investor, said: 'The latest PLSA data underscores a simple but important truth – the cost of maintaining a decent standard of living in retirement doesn't stay still.
'The report offers a useful benchmark for what a 'comfortable' or 'moderate' retirement might look like in today's terms. But it's important to remember that retirement planning isn't one-size-fits-all. That's why these standards should be seen as a guide rather than a rulebook.
'Everyone's circumstances are different – from housing and health to lifestyle and family support. The key is to plan early, revisit regularly, and build in some flexibility to weather life's inevitable changes.'
A Department for Work & Pensions spokesman said: 'Hard-working people deserve security in their retirement, which is why this week we introduced our Pension Schemes Bill to boost the pension pots of 20 million pension savers.
'We are determined to drive costs down and returns up on workers' retirement savings, with bigger and better pension funds also driving long-term investments in the UK to boost economic growth – delivering on the Plan for Change to put more money into people's pockets.'
