Britain’s pension system has “not kept up” with the changing economy as MPs face calls to “act now” and save millions from a retirement savings shortfall.
The UK’s pensions framework is under the spotlight following new research from the Pensions Policy Institute, which has published a report titled “Pensions Adequacy: Housing, Households and Auto-Enrolment”, on behalf of the ABI.
According to the findings, auto-enrolment has proven remarkably effective at encouraging millions to save for retirement. However, the scheme rests on assumptions about working patterns that have become increasingly disconnected from reality.
The research draws on evidence from the Pensions Commission’s Interim Report, which argues that pension pots alone can no longer determine whether someone will enjoy a comfortable retirement.
Growing numbers of people who rent rather than own property, evolving household compositions, and increasingly interrupted career paths mean more individuals face the prospect of insufficient income in later life.
Those who rent their homes face perhaps the starkest retirement challenge, the report warns. By 2044, the number of pensioner households living in rented accommodation is expected to triple, with nearly two million additional households in this position.
Yet typical private pension savings for people between 60 and 64 stand at around £154,000. The cost of renting a two-bedroom property throughout retirement ranges from £200,000 to £400,000 depending on where you live, consuming pension wealth entirely.
The long-standing expectation that most workers would reach retirement having paid off their mortgage is rapidly becoming obsolete, the research notes.
Housing expenses, caring duties and domestic circumstances now play a decisive role in determining whether individuals can sustain a reasonable standard of living after they stop working.
People living alone confront additional financial pressures, requiring roughly 28 per cent more income than couples to maintain an equivalent lifestyle.
Divorce remains a significant threat to retirement security. Just 11 per cent of separating couples arrange to share pension assets, while survivor benefits under defined contribution schemes are no longer guaranteed.
They cannot participate in auto-enrolment, receive no employer contributions, and have no automatic mechanism prompting them to save.
Research from PensionBee reveals that someone working for themselves on £30,000 annually could retire with £64,000 less than an employee earning the same amount, primarily due to missing employer contributions.
Workers earning near the £10,000 threshold find that the advertised eight per cent minimum contribution actually translates to barely 3 per cent of their total earnings, since payments apply only to qualifying income rather than every pound earned.
Maike Currie, VP Personal Finance at PensionBee, said: “This report lays bare a structural mismatch at the heart of the pensions system.
“Auto-Enrolment was designed for a Britain where most people bought a home, stayed in one job for years and retired as part of a stable couple household.”
She urged self-employed workers not to wait for systemic reform, noting that personal pensions require neither an employer nor fixed monthly payments and typically attract Government tax relief.
Ms Currie called for policymakers to use Self-Assessment tax returns to encourage pension saving and recommended reducing the Auto-Enrolment age from 22 to 18.
