New pensions warning issued

A generation of us could be left with insufficient money for retirement unless the government takes action.

Savers are at risk of having a pension shortfall if more action isn’t taken on increasing contributions and educating people on what is an adequate retirement income.

Research by the Pensions Policy Institute (PPI) says someone on a low income, earning £15,700 per year, will require private pension wealth of £57,000 to replace that money when they retire.

Those on median incomes earning £24,900 per year will need £278,000 to meet their target replacement rate - the proportion of their pre-retirement income that their pension provides.

The PPI says that achieving these replacement rates isn’t so easy anymore, as fewer people are in defined benefit (final salary) schemes, and two in three employee contributions are now in defined contribution (DC) pensions.

It warns that around 90% of all DC savers are at risk of not achieving a decent replacement rate.

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Many of those at risk of a shortfall, according to the PPI, are on low incomes, work part-time, are self-employed or unemployed.

The PPI suggests the government should lead a consensus building exercise to reach a shared understanding of retirement income adequacy.

This would be boosted by raising minimum employee auto-enrolment contributions from 5% to 8% as well as lowering the age criteria from 22 and removing the £10,000 annual earnings threshold for workplace schemes, the PPI says.

It also suggests that self-employed people should have access to auto-enrolment schemes.

What’s more, the government should ensure a greater uptake of Pension Wise advice and guidance through the implementation of auto-appointments for people when they reach age 50, according to the PPI.

This will help people understand their pension options before taking anything from the pot. 

Daniela Silcock, head of policy research at the PPI, says: “Changes in the way people work, save and retire mean that traditional measures of adequacy are not as relevant as they used to be.

“A new consensus is required to generate retirement income adequacy targets that people can use and which allow for both income and liquid capital in retirement. 

“Achieving a consensus will not be straightforward as it requires agreement from industry, employers and unions and the overall support of government in order to ensure all key stakeholders play their parts.”

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Nigel Peaple, director of policy and advocacy at the Pension and Lifetime Savings Association, says consensus is needed to guide the level of automatic-enrolment contributions, the value of the state pension, and the fiscal support for additional pension saving.

He adds: “In the PLSA’s 2016 report on retirement income adequacy, we showed that if the level of automatic-enrolment contributions is not raised, only about half of people eligible for workplace pensions will achieve the 2005 Pension Commission’s target retirement income replacement rates.”

interactive investor has argued that the minimum savers should put away for retirement is 12% of income rather than the total auto-enrolment minimum of 8% (personal and employer contributions combined).

A report from interactive investor and actuarial consultancy LCP, highlights the impact low contributions could have on retirement incomes. 

Consumer watchdog Which? has also provided figures on how much you may need in your pension if you want an essential, comfortable or luxury retirement.