Britain is grappling with a severe retirement savings crisis, with newly released Department for Work and Pensions figures revealing that more than two-fifths of working-age adults—equivalent to 14.6 million people—are failing to save adequately for their later years.
The situation is particularly acute amongst the self-employed, with over three million not contributing to any pension scheme, whilst only one in four low earners in the private sector are actively saving for retirement.
The scale of the problem becomes clearer when measured against industry standards, with fewer than one in four people on track to achieve what Pensions UK considers a “comfortable” retirement income level. More concerning still, over one in ten won’t even reach the minimum income threshold, potentially leaving them unable to meet basic living costs in retirement. This represents a significant challenge for future retirees, who are projected to receive 8% less private pension income than those retiring today, despite benefiting from automatic enrolment schemes for much of their working lives.
Tom Selby, director of public policy at AJ Bell, warns that without dramatic increases in pension saving rates, the vast majority of people retiring in the 2050s will be forced to abandon even modest retirement luxuries.
To help avoid this, Selby has provided five pension tips for those preparing for retirement to consider:
- Make the most of employer contributions and tax relief
“The first thing all employees should do is check to make sure they are opted into their workplace pension scheme and make the most of their employer contributions and tax relief.
“It is vital people make the most of employer contributions, which effectively tops up your pension for free. This will significantly boost your pot over time, particularly as you benefit from tax-free investment returns on your own money and the tax relief top-up. Even small contributions each month can add up. For example, putting away £100 a month, which then gets automatically topped up to £125 a month after tax relief, would be worth almost £52,000 after 20 years, assuming 5% investment growth a year after charges.”
- Check charges and consolidate
“Checking which provider your pension pots are held with and what fees they charge is also a solid step. There’s a decent chance many people will have multiple pension pots that they’ve accumulated through various employers too, which can be tricky to navigate. Consolidation of all of those pots with a single provider can come with some significant benefits. Most obviously, a single retirement pot is much easier to track and manage than having various pensions with different providers. You could also benefit from lower costs and charges, increased income flexibility and more investment choice by switching provider.”
- Increase contributions
“Saving regularly into a pension as early as possible is the single most effective way to boost your retirement income in the long term. Even small increases in contributions can make a huge difference in retirement, so start by figuring out your budget and prioritising short, medium and long-term savings goals. Once you’ve done that, you should have a clearer picture of your current spending and any spare money you might have to set aside for your financial future.”
- Opt-in
“Although it may have been tempting to opt-out of your workplace pension over the past few years to fund rising bills and everyday spending, that should be a last resort and something you try and reverse as soon as possible. Opting out means you won’t get your employer contribution, effectively meaning you’re giving up on free money and voluntarily reducing your overall pay package.”
- Look at Lifetime ISAs
“The Lifetime ISA can also be an attractive retirement saving option, for self-employed workers and basic-rate taxpayers saving outside their workplace pension in particular. For most employees a pension will be the best option thanks to the employer contribution on offer. Self-employed workers can’t access that, but are able to save into a Lifetime ISA, earning a bonus equivalent to basic rate tax relief, without the need to pay tax on withdrawals.
“Lifetime ISA funds have the flexibility to be withdrawn early – albeit with an exit penalty that means you might get back less than you put in – if your financial circumstances take a turn for the worse. On top of this, income withdrawal is completely tax-free after age 60. Pensions, on the other hand, generally can’t be touched until you reach age 55 (rising to 57 in 2028) and only offer 25% tax free on withdrawal.”