Current pension savings will not be sufficient provide what people need in retirement to sustain an acceptable standard of living, the The Pensions Policy Institute (PPI) has revealed.
This ‘pensions gap’ between what workers have and what they need is a challenge to both the private sector and the public purse. The new flat-rate pension will not be enough to lift many retired households out of poverty – and workplace pension schemes have been charged with making up the difference. It is this gap which fuelled the introduction of auto-enrolment in October 2012, starting with the country's largest companies. By completion, around 10 million people will eventually be automatically enrolled into workplace pension schemes.
But a report published today by the PPI and JP Morgan Asset Management revealed that the average earner must up their pension contributions if they are to replicate their income in retirement – even taking into consideration the state pension.
The report suggests six ways in which the pensions gap could be closed – including two which put the onus on saving more: increasing minimum contributions over time and higher minimum contributions for median-higher earners.
The PPI also suggested that employers should match scheme members’ contributions and educate their employees about the importance of saving.
Simon Chinnery, UK Head of Defined Contribution at JP Morgan said the pensions’ freedom reforms have been well received by the industry, but it does put greater financial responsibility on the individual.
“The risk is that such individuals will not take advantage of opportunities to increase the size of their pension pot, such as company matched schemes. Some existing policies, such as auto enrolment, are helping but with an average defined contribution pension pot size of £35,600 clearly more intervention is need.”
Chinnery said that it was also the responsibility of all pension providers to support improvement policies, and enable advisers and pension trustees to make appropriate investment decisions.
It is not just existing pension savers that would benefit from additional education when it comes to retirement expectations. The Aegon UK Readiness report revealed that just 7% of the UK population are on track for the retirement they want, and that young adults aged between 16 and 24 expect an annual pension income of £42,195. This figure is more than seven times the £5,881 provided by the state pension for a single person.
