Are You Heading For Retirement Poverty?
In April, the New State Pension increased by £9.05 (4.1%) a week to £230.25. Almost simultaneously, the National Living Wage (NLW) rose by 77p (6.7%) an hour to £12.21. That NLW rate equates to £427.35 for a 35-hour week, just short of £200 a week more than the State Pension. The gap between the two underlines the need for private provision to make retirement affordable.
Successive governments have made various efforts to encourage retirement savings, including generous tax reliefs on pension contributions and automatic enrolment in workplace pensions. However, recent research suggests there is still a long way to go before most of the current working population can look forward to a financially comfortable retirement.
A 15.3 million miss…
The recently published 21st annual retirement report from Scottish Widows in conjunction with Frontier Economics estimated that “15.3 million people today are at risk of retirement poverty”. The report’s definition of retirement poverty draws on calculations by the Pensions and Lifetime Savings Association (PLSA), which regularly calculates how much net annual income is required to support three different retirement living standards. The report uses the PLSA’s figures for 2023/24, updated for last year’s inflation – and, as such, are very similar to the PLSA’s recently published figures for 2024/25. They are:
| Minimum | Moderate | Comfortable | |
|---|---|---|---|
| Definition | Covers all your needs, with some left over for fun | More financial security and flexibility | More financial freedom and some luxuries |
| Single person | £14,800 | £32,200 | £44,400 |
| Couple | £23,100 | £44,400 | £60,800 |
These figures exclude housing costs and are for retirees living outside London. When the report talks of retirement poverty, it is referring to projected net retirement income below the minimum level figure.
Why are so many people at risk?
You could be forgiven for thinking that the combination of a state pension at nearly £12,000 a year plus automatic enrolment in workplace pensions should be enough to stave off retirement poverty, but it is not. The report highlights three groups of people who are the most likely to face a financial challenge when they stop work:
Squeezed low to middle earners. In this category, the current way in which automatic enrolment operates is an issue. Anyone earning up to £10,000 a year is not automatically enrolled, although many will have the option to opt in. For those earning above £10,000, the minimum contribution is based on earnings above £6,240, a deduction which can be a significant proportion of overall pay for modest earners, especially for part-timers. The report found that people in their 30s earning between £20,000 and £35,000 were the mostly likely to contribute at the minimum.
There is legislation on the statute book which permits the government to cut or even eliminate the £6,240 exclusion quickly, but there is no indication it will be used any time soon. Any reduction would increase employers’ pension contributions and, after this year’s controversial National Insurance rise and the hike in the NLW, the government does not want to go there.
Generation Z (typically categorised as people born between 1996 and 2010). Generation Z is finding early working life harder than their Gen X or baby boomer parents experienced. Other financial goals have made saving for a distant retirement a challenge for Gen Z. A quarter of people in their 20s put saving for emergency expenses as their priority. 13% are not able to set aside any savings according to the research. The report calculates that 42% of people in their 20s are at risk of poverty in retirement, with close to another quarter on course to afford only a minimum retirement lifestyle.
The self-employed. The latest data from the Office for National Statistics shows that about 13% of the UK’s workforce – 4.4mn people – are self-employed. This category have never been included in automatic enrolment, an oversight which more than ever looks an error. The report says that just over half of the self-employed are in danger of being unable to meet their basic retirement needs. A quarter are on track to achieve only the minimum retirement lifestyle, while almost another quarter are not saving at all. These grim findings are not news, as other research over the years has shown poor projected outcomes for the self-employed.
The underlying message from the research is that retirement savings need to be higher – and not just amongst the three most at-risk categories.
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