Nearly a third of all British workers are heading for a substantial fall in their living standards when they retire – with the majority being medium to high earners, ministers have warned.
A new study by the Government, released today, reveals that up to 12 million people will face a shortfall in their pensions despite the introduction of automatic enrolment.
It found that around one in 10 of those earning more than £35,000 a year will end up in the poorest 20 per cent of pensioners when they retire.
The report concluded that someone earning £40,000 a year would need to save £5,260 a year including employer contributions to have same standard of living in old age.
Launching the paper, Steve Webb, the Pensions minister, said that the pensioners of tomorrow could not afford to rely on the state pension which, because of the growing elderly population could only ever be a “floor”.
“In a world where there are 50 per cent more pensioners, you can’t just hope that a future Government will honour a large state pension to ever more pensioners,” he told The House magazine.
“There’s a limit to what one can do to address those sorts of things. When you have got nine workers to every pensioner, you can have pretty generous pensions. When you’ve got two workers to every pensioner, it just ain’t gonna hold.”
The report found that just over 13 million people will be headed for a fall in living standards without the Government’s push to enrol employees automatically in work-based pensions. This is two million more than ministers had originally thought, but should be reduced by around 1 million to 12 million by automatic enrolment.
Mr Webb said: “Under-saving is far from being the exclusive preserve of low earners. Many on middle and higher incomes clearly need to do much more than this to ensure that they get the retirement that they want.”
The Government has long been aware that the UK’s falling savings rates, combined with an ageing population, will pose significant challenges. They commissioned the study in an effort to get an accurate estimate of the problem.
Already the Government has legislated to increase the state pension age to 68, and to link it in future to average life expectancy. This could mean it reaches 77 for current school leavers.
But Mr Webb said there was also a problem of people who stopped working early often because of poor health. “Those who drop out of the labour market in their 50s – perhaps due to long-term sickness, general poor health or caring responsibilities – can seriously damage their retirement income,” he said.