Are we saving enough for our retirement?

06 August 2024

Written by Retirement Line

As retirement approaches, many in the UK are faced with the pressing question: are we saving enough? 

With the cost-of-living soaring in recent years, just saving for a rainy day is hard enough for many people, let alone putting away enough money for a comfortable retirement. To address the issue, new research from the Resolution Foundation explains the ‘triple saving challenge’ being faced by today’s savers – and how we can all save more for our future.

The triple savings challenge

According to a report by the Resolution Foundation, families across the UK face a ‘triple savings challenge’, with inadequate savings put away to help in three key areas:

• Rainy days - a financial buffer sudden unexpected expenses.

• Bigger life events - substantial savings to cope with major life changes such as unemployment or family breakdowns.

• Retirement - ensuring sufficient funds to maintain an adequate income during retirement years.

The report paints a concerning picture. According to its data, one-in-three working-age families lack basic 'rainy day' savings of at least £1,000, with half of low-income families in this precarious position. Naturally this makes them particularly vulnerable to financial shocks such as the boiler or car breaking down.

It also found that less than half of working-age families have savings equivalent to three months of income, which is crucial for handling significant life events.

Furthermore, around two-in-five working age people – equivalent to 13 million – are currently not meeting the minimum savings target to achieve an adequate retirement income, which is judged to be at least two-thirds of their pre-retirement income.

The pension paradox

Whilst it is true that auto-enrolment has increased pension participation significantly — from 47% in 2012 to 79% in 2021— it is clear that many are still not saving enough. It creates a pension paradox where on paper more people are saving for retirement, yet still falling short of the amount needed to ensure financial security in their later years.

According to research by the Institute for Fiscal Studies in 2023, almost a fifth of working-age private sector employees (around 3.5 million people) do not put a penny into pension savings in a year – particularly low earners below the threshold for automatic enrolment.

It also found that fewer than one-in-five self-employed workers are saving in a pension.

Furthermore, there appears to be a grave lack of understanding of how much State support will be available when workers reach retirement. An IFS report in 2023 found that 46% of 50-64-year-olds were completely unaware of how much a full State Pension is worth per week. It means they may have very little understanding of how much they’ll need to top up the State Pension in order to achieve a comfortable income.

How much should we be saving?

Every year, the Pensions and Lifetime Savings Association (PLSA) releases the Retirement Living Standards report. This outlines the annual income needed for three retirement lifestyles: minimum, moderate and comfortable. 

The latest report indicates a rise in required amounts due to inflation, particularly in essentials like food and energy. For a ‘minimum’ retirement, singles need £14,400 per year and couples £22,400. 

This budget covers £126 per week for food, one UK holiday, a fortnightly takeaway and leisure activities, assuming access to public transport and no car ownership.

With the full new State Pension currently covering the first £11,502 of this, it leaves a gap of around £3,000 per year for a single person to achieve through other means.

The amount needed for a ‘moderate’ standard of living in retirement has risen to £31,300 per year for singles and £43,100 per year for couples. This allows for a car, a two-week all-inclusive holiday every year, £100 a month for a meal out and more.

Standard Life carried out some analysis using the Retirement Living Standards data. For the ‘moderate’ standard, they found that people need a pension pot of £285,000 to generate the required income to top up their State Pension.

However, data from the Office for National Statistics for the period April 2018 to March 2020 shows that those aged 55-64 with pension savings had an average pot of £107,300. This is well below the amount that Standard Life calculated for a ‘moderate’ retirement living standard.

Strategies for improvement

To address the current retirement saving challenges being faced by workers, the Resolution Foundation suggests several strategies which it believes will help the growing problem:

• Increase auto-enrolment contributions. It suggests workers gradually raise their contributions from 8% to 12% of earnings, split equally between the employer and employee.

• Create a 'sidecar savings' scheme. A mechanism could be introduced where a portion of contributions (2% out of the proposed 12% auto-enrolment target) goes into an accessible savings pot for immediate needs, while the rest is allocated to long-term retirement savings.

• Flexible pension access. Allowing early, restricted access to pension funds (up to £15,000 or 20% of the pension value), with the loans paid back via higher contributions into their pension pot at a later date. This could provide a safety net during financial emergencies without compromising long-term retirement goals.

The importance of putting enough away for your future

As we approach retirement, it’s crucial to ensure we have enough savings to achieve our desired lifestyle. As we have seen in recent years, inflation and the rising cost of living can significantly impact daily expenses, so having enough cash put away really can make all the difference.

Additionally, people are living longer, which means potentially higher healthcare costs, including care in later life. Adequate savings can help cover these expenses without financial strain.

Life is unpredictable, and unexpected expenses can arise. A robust savings cushion can also help us handle day-to-day costs like home and car repairs or helping out our loved ones, without compromising our own financial stability. By making sure we save enough for our future, we can achieve peace of mind as well as a comfortable retirement. 

Finally, retirement saving isn’t all about bills and covering the essentials. After years of working hard, retirement should be a time for enjoyment. By saving effectively, we can look forward to travelling, pursuing hobbies, and spending time with family and friends without financial worries!

Sources:

The ‘triple savings challenge’: Families need help in rising to the ‘triple savings challenge’ of saving more for rainy days, bigger life events and retirement. The Resolution Foundation. Accessed 17 July 2024.

Almost a fifth do not put a penny into pension savings: Challenges for the UK pension system: the case for a pensions review. Institute for Fiscal Studies. Accessed 17 July 2024.

46% of 50-64-year-olds unaware of how much State Pension is worth per week: Amidst confusion, there’s widespread pessimism about future standards of living in retirement. Institute for Fiscal Studies. Accessed 17 July 2024.

Amounts needed for a moderate and comfortable retirement: Retirement Living Standards. Pensions and Lifetime Savings Association. Accessed 17 July 2024.