Millions of workers in the UK are at risk of facing a grim retirement due to insufficient pension savings, according to a new report from the Institute for Fiscal Studies (IFS). The think-tank warns that between five to seven million people, or 30% to 40% of private sector workers, are not saving enough into their pensions to ensure a comfortable retirement. The IFS suggests that “default” contributions should be higher for middle-earners and that employers should make contributions even if their staff do not.
The report finds that one in five workers are not contributing to their pension pots at all, while less than half are saving more than 8% of their earnings. To address this issue, the IFS proposes that employers contribute 3% of total pay into workplace pensions, regardless of whether employees make their own contributions. Additionally, the think-tank recommends that employees with above-average earnings should have a higher “default” contribution rate of 7%.
UK workers’ pension shortfall risks
The IFS also suggests expanding the age range for automatic pension enrollment from the current 22 to state pension age, extending it to include those aged 16 to 74. These measures aim to help more people save adequately for their later years.
Laurence O’Brien, a research economist at IFS and co-author of the report, commented, “Too many private sector employees appear on course to end up with a low – or disappointing – retirement income. Despite the advantages of automatic enrollment, more than one in five private sector employees are still not saving in a pension.”
David Sturrock, another senior research economist at IFS, emphasized the importance of employer contributions, stating, “There is a strong case for almost all employees to receive an employer pension contribution, irrespective of whether they make a contribution themselves.”
Mubin Haq, chief executive of the abrdn Financial Fairness Trust, added that guaranteeing 3% from employers could boost pension contributions by £4 billion per year, particularly benefiting women, part-time workers, young adults, and low-paid workers. The Department for Work and Pensions (DWP) responded to the report, stating that they will ensure the pensioners of tomorrow have the dignity and security they deserve in retirement through their landmark pensions review.
The review aims to boost investment, increase pension pots, and tackle waste in the pension system, with more than 15 million savers potentially benefiting from the new Pension Schemes Bill.
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