Significant numbers of people are at risk of a retirement “cliff edge” fall in income when they stop work, a pensions industry body has warned.
Pensions UK made the warning as it published updated “retirement living standards”.
The standards have been developed to help people understand what kind of lifestyle they could be on course for in retirement.
They are calculated by the Centre for Research in Social Policy, Loughborough University, and set out three lifestyle levels in retirement – a minimum lifestyle covering basic needs with some money left over for discretionary spending; a moderate lifestyle with more financial security and flexibility; and a comfortable lifestyle with more financial freedom and some luxuries.
According to the calculations, a minimum retirement lifestyle costs around £13,900 annually for a one-person household and £22,500 for two people.
A moderate lifestyle costs £32,700 for one person and £45,400 for two, while a comfortable lifestyle costs around £45,400 for one person and £62,700 for two.
Pensions UK said it expects around 82% of the working population across the UK to reach at least the minimum standard of living in retirement, falling to just 23% reaching a moderate standard and less than one in 10 (9%) enjoying a comfortable lifestyle.
It said it wants to see more action to help fix the retirement savings gap, with employers where possible offering matching contributions above minimum levels.
Pensions UK also said that housing costs are not included within the retirement living standards, as they vary significantly depending on location and personal circumstances.
Some people will enter retirement owning a home outright and be mortgage‑free, while other people may continue to have a mortgage and others may rent.
This means it is important for individuals to use the standards as a guide and adjust them to reflect their own situation, Pensions UK said.
Zoe Alexander, executive director of policy and advocacy at Pensions UK, said: “The latest update to the retirement living standards underlines a clear reality for many people – today’s saving levels will not be enough for the retirement they expect.”
She added: “Without action, too many risk facing a cliff edge drop in income when they stop work.”
Ms Alexander added: “We also encourage people to speak to their employer and see whether the organisation is prepared to support them to save above the minimum, such as higher rates of matching pension contributions.”
Professor Matt Padley, co-director of the Centre for Research in Social Policy at Loughborough University, said the retirement living standards “provide a ‘real-world’ starting point for individuals in thinking about the sort of retirement they want, what this might cost, and how they might get there”.
He added: “We know that many people are not saving enough for retirement, but we also know that for some people it is simply impossible to save any more – you can’t save money you don’t have.
“By providing a living standards benchmark, the RLS (retirement living standards) can help us to think through the roles of the state, employers and individuals in ensuring everyone is able to have at least a minimum standard of living in retirement.”
Jamie Jenkins, director of policy at Royal London, said: “Although many are on track for a minimum standard, overall financial resilience in retirement is still a long way off.
“Encouraging people to start saving earlier and saving more could make a significant difference.”
Emma Furlonger, managing director of workplace and retail intermediated (interim), at Standard Life, said: “Encouraging earlier engagement, supported by clear benchmarks and other tools such as pension calculators and engaging communications, is key to helping savers, employers and the wider industry as we work together to support more informed decisions and better retirement outcomes.”
Anne Jones, senior director at WTW, said: “As an industry we need to do more to help individuals understand their own individual target and how they can get there.”
Andrew Prosser, head of investments at InvestEngine, said: “Closing this gap requires people to engage with their pensions earlier, as many do not realise that they are falling short until much later in life.
“Our own research into pension engagement found millennials are often less engaged than both Gen X and Gen Z, despite being the first generation to spend most of their working lives under auto-enrolment.”
Charlene Young, senior pensions and savings expert at AJ Bell, said: “Pension savings are ultimately there to pay us an income when the time comes to retire, but the shift from pension promises to pots can sometimes leave people scratching their head at how much they need to put away.
“The Pensions UK figures can help people crunching the numbers to work out what they’ll need to get by, depending on how they want their retirement to look.”
She added: “While automatic enrolment has been successful in getting more people saving into a pension in the first place, anyone getting just minimum contributions is particularly at risk of their savings not meeting their retirement expectations.
“The same goes for people who intend to rely on little more than the state pension alone, including many self-employed people.
“Without taking control of their pension pots, increasing contributions and making the most of the tax perks on offer, those currently saving for retirement will be forced to choose between working far longer or living on a pittance in their later years.”
Kirsty Ross, proposition director for People’s Pension, said: “When people see the rising cost of everyday essentials alongside the rising cost of retirement, it’s understandable that long-term saving can slip down the list of priorities.
“The challenge for the pensions industry is helping savers understand not just what retirement might cost, but what practical steps they can take today to improve their future outcomes.
“While retirement can seem a long way off, particularly for younger workers, starting to save early remains one of the most effective ways to build financial security later in life.”
