Half of workers have less than £2,300 in their pension pots

Low-to-middle income workers most affected by underfunded pensions, think tank says.

The worrying state of UK savers’ retirement plans have been highlighted by a report which shows half of low-to-middle income workers have less than £2,300 in their pensions.

Think tank The Resolution Foundation looked at the typical total pension wealth for workers in the bottom half of the income distribution, who did not have substantial defined benefit pension savings.

Its analysis found savers aged 25 to 34 had just £319 in their pension in 2016-18. Those aged 35 to 44 had £1,562, and the age group nearest to retirement, aged 45 to 54, had just £2,391 saved into a pension. These amounts are just a tiny fraction of what is required in retirement.

Minimum income standards in retirement range from a weekly income of £209 for a single homeowner, to £445 for a couple in private rented accommodation, according to the Resolution Foundation report. Achieving these retirement income levels would require a final pension pot of around £70,000, it said.

The report argued the current 8% auto-enrolment minimum pension contributions fall short of what is needed for adequate retirement income, and that further action is needed to encourage greater saving.

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A worker aged 25 today would need an overall pension contribution rate (including employer and employee contributions, plus tax relief) of 11.2%, equivalent to saving £2,100 a year if earning the Living Wage, according to the report. This is 3.2% more than the minimum contribution rates under auto-enrolment.

Workers 10 years older need to save more. Someone aged 35 today would need a contribution rate of 15.1% – or £2,800 a year if earning the Living Wage – to reach a living pension saving target on retirement.

The Resolution Foundation wants a new ‘Living Pension’ to be adopted by employers to get them to contribute more to staff pensions to help ensure their employees are saving enough to enjoy a decent standard of living in retirement.

A Living Pension scheme would build on the successful Living Wage campaign, which encourages firms to pay their staff wages that deliver an adequate standard of living today. 

The next step, according to the think tank, is to take on the more challenging task of delivering decent living standards in the future. It says this could be achieved by getting employers to commit to a Living Pension scheme.

David Finch, senior research fellow at the Resolution Foundation, said: “The roll-out of auto-enrolment has got millions more workers saving into a pension, and our proposal would build on its success. 

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“By setting minimum contribution rates or cash targets, a Living Pension would mean that firms can offer their staff decent living standards when working today, and in retirement tomorrow.”

Lindsey Rix, CEO of UK Savings and Retirement at Aviva, said the pension giant has been working with the Living Wage Foundation, which will now use this report to develop and pilot a Living Pension accreditation standard equivalent. 

“We believe this would help low-to-middle income employees focus on how they can reach a decent standard of living in retirement,” she said.

“Low-cost, accessible services such as tailored guidance and simplified, focused advice could also support individuals in achieving this outcome. If a Living Pension accreditation standard is created, it will be an exciting step forward for pension saving.”