Economics research institute The Institute of Fiscal Studies (IFS) has reported almost a fifth of working-age private sector employees (around 3.5 million people) do not do any pension saving each year.
Government recommends employees save 15% of their income for their pensions. However, the IFS found 87% of working age adults are saving less than this guideline.
Its new report has called for a pension review and forecasted financial difficulties for current workers in old age.
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Jonathan Cribb, associate director at the IFS, said people must be mindful of the impact their lack of savings may have on them in later life.
Speaking to HR magazine, he said: “How much you will have in retirement is in large part about how much and when you and your employer contribute to your pension savings.
“If you leave it too late you can’t go back in time and contribute more.”
The report found employers have started to offer defined contribution pensions, rather than defined benefit arrangements.
A defined contribution (DC) pension scheme is based on how much has been contributed to a pension pot and the growth of that money over time. Whereas defined benefit (DB) plans offer a set benefit each year after retirement.
Though DC schemes offer more flexibility over when employees can withdraw their pension, they also incur more risk.
Taking money out too quickly can result in money running out. Too much caution can also lead to needlessly frugal retirement.
Cribb said employers have an important role to play in helping employees navigate this, even if they aren’t willing to run traditional defined benefit schemes.
He said: “They could choose to make higher contributions than the mandated minimums if they are looking to help their employees with their retirement planning – something that many employers of higher paid people already do.”
Nigel Peaple, director of policy and advocacy at trade association the Pensions and Lifetime Savings Association, said government needs to reconsider plans to increase the state pension age.
Speaking to HR magazine, he said: “The state pension makes up the majority of retirement income for most people.
“As the IFS recognises, increasing the state pension age will only escalate pensioner poverty which falls disproportionately on those who have lower incomes and retire early due to ill-health.”
The IFS said raising the state pension age makes sense due to growing life expectancies but warned it will pose difficulties for those with long term health conditions.
Among those in their late 60s, 35% of men and 40% of women are disabled or have a long-term health condition that impacts their everyday life. These rates rise to 43% and 46% respectively for those with low levels of formal education.
Under raised pension ages, these people could have to work for longer.
Peaple said the government needs to do more to improve the system.
He praised Laura Trott, minister for pensions, on backing the Gullis Bill on automatic enrolment into pension contributions.
He said: “No time should be lost in asking politicians to make the changes necessary to achieve adequate pensions.
“This includes ensuring the state pension protects against poverty and broadening automatic enrolment pension contributions so they cover more people.”
Samantha Gould, head of campaigns at pension provider Now: Pensions said auto enrolment could improve many people’s retirement prospects.
Speaking to HR magazine, she said: “Since it was introduced ten years ago, auto enrolment has transformed how millions of people in the UK save for their pensions.
“Yet for far too many groups are locked out of the auto enrolment system, unable to earn enough to put money aside for later. As a result, millions of people are retiring into poverty every year.
“Our 2022 report revealed that there are 8.6m people who are currently ineligible for auto enrolment, through no fault of their own.”
Gould also said the current pension system does not reflect modern flexible working patterns.
“Our current pension system is not suited to help employees who take significant career breaks, work in multiple or part-time roles, or frequently move between jobs,” she said. “A lot of these are characteristics that we typically see for working women.”
The IFS also raised concerns about the low rate of contribution from self-employed people as fewer than one-in-five self-employed workers are saving in a pension.
The ageing population is also a concern, as more state pension recipients will put pressure on public finances.
Cribb said a pension review is essential in helping the government understand the pension problems of the future.
“The government needs to be aware of the problems coming down the track; falling rates of homeownership, low levels of saving for the self employed, and serious public finance pressures from ageing,” he said.