12.2m facing inadequate retirement income

An estimated 12.2 million people are facing inadequate retirement incomes, according to a report by the Department for Work and Pensions (DWP).

Its Framework for the analysis of future pension incomes, which was published on 11 September, found that, with government reforms, such as auto-enrolment, a new state pension and increases to the state pension age, more than half of people currently of working age are expected to build adequate retirement incomes and maintain their living standards.

These estimates use the Pensions Commission benchmarks, which provide an overall guide to how much income in retirement is needed to maintain living standards.

The report produces an overview of projected future retirement incomes in order to look at the impact of the government’s pension reforms as a whole, identify where remaining challenges exist and for whom, and recognise that these are long-term challenges which need to be thought about well in advance.

The report details the reasons that people face inadequate retirement incomes, including:

  • Not working. For most low earners (earning up to ÂŁ20,000 a year), the combination of the state pension and saving at the minimum contribution level into default funds through auto-enrolment will be enough to maintain similar living standards in retirement. For low earners who face inadequate retirement incomes, the problem is mostly due to significant periods spent out of work.
  • Not saving while in work. For moderate earners, the challenge is to ensure that they are saving for every year of their working life, and, in some cases, saving enough. 
  • Not saving enough. To ensure that they retire on at least half to two-thirds of their working age income, moderate and higher earners will need to save significantly more than the default auto-enrolment minimum combined contribution of 8% of their earnings.

The report shows that, based on a cautious set of assumptions about changes in future saving behaviour, the government’s pension reforms will:

  • Reduce the number of people facing inadequate retirement incomes by 1 million.
  • Increase the incomes, and replacement rates, of 73% of those facing inadequate retirement income, bringing them closer to their target income.
  • Halve the proportion of future pensioners who will retire with no private income at all from 27% to 12% in 2050.

The government is working with the pensions industry to enable savers to have more certainty in their pension outcomes. 

It intends to update the modelling as evidence becomes available on the impact of auto-enrolment, the single-tier state pension and state pension age changes on work and saving.