Last week, the government published a report from the Department for Work and Pensions that revealed a staggering 11.9 million people living in the UK are failing to save enough money for their retirement.
The findings, however, were accompanied by a message of hope rather than of despair. Though the figure is huge, over half of those failing to reach their pension targets were actually managing to accumulate at least 80% of their savings goal, meaning that it would only take a modest change in savings techniques to radically alter Britain’s economic future.
“While the state will always provide a decent safety net so people can get by,” said pensions minister Steve Webb, in response to the report, “anyone wanting to see their standard of living maintained into old age needs to make their own provision too.”
In the Wake of Reform
There have already been a number of pension reforms in favour of retirees reliant on the state pension. Most notably, the coalition introduced a “triple-lock guarantee” in 2010, a decision that actually favoured low-income earners.
The triple-lock is essentially the promise of a state pension that is increased in accordance with the highest of three factors (hence the “triple”):
- Inflation rate;
- Average earnings, or;
- A yearly minimum of 2.5%
Thanks to the triple-lock system, the state pension is set to be increased from £113 a week to £131 by 2020, assuming that the plan proves feasible over the coming years.
But although the triple-lock system caters for low-income earners, the DWP found that it is in fact middle and high-income earners that are the worst prepared for retirement, especially those between 50 and the state pension age.
The report found that people in middle-income groups – that is, those earning between £22,700 to £32,500 – typically did not contribute to a private pension while they were in work, while those classed as high-income earners – between £32,500 and £52,000 – generally did contribute, but not enough to generate a decent retirement income in the future.
So in light of the research, what can people considering retirement do to provide for themselves?
Well, the DWP pinpointed three main causes of a failure to prepare. It found that the key factors leading to poor retirement income prospects were:
- Not having a full work history – having a work history with frequent long gaps in employment restricts the basic state pension you’re eligible for due to a lack of National Insurance contributions. If you have a work history of less than 35 years, make sure you are investing in a private pension pot to make up the difference.
- Not contributing to private pensions while in work – it can be difficult to focus on saving for retirement while you’re working, but it’s the most important time to do so. Take advantage of auto-enrolment programmes, to which your employer and the taxman both contribute.
- Not contributing enough to private pensions – people over 50 need to reassess their expenses to accommodate for significant contributions to a private pot. The reason that high-income earners tend not to save as much is because of immediate expenses (large houses, expensive cars), so consider downsizing in the run-up to retirement to free up some extra money to save for later life.
Preparing for your future doesn’t have to be a nightmare; it just requires a few modest changes in the present.