The pension landscape in the UK has changed significantly over the past two decades, influenced by factors such as a lower expected rate of return on savings and increased life expectancy. This has meant that private sector employees must save more to reach their retirement goals compared to 20 years ago. The introduction of automatic enrolment has further shaped the pension-saving behaviour of employees, making it essential to assess the financial readiness of today’s workforce for retirement.
The Wealth and Assets Survey provides key insights into the current state of pension savings among private sector employees aged 25 to 59 who are saving into defined contribution (DC) pensions. DC pensions differ from defined benefit (DB) schemes as they depend on the amount saved and investment returns, transferring the investment risk to employees. One notable finding is the wide disparity in pension wealth, with approximately 40% of employees saving into a DC pension having accumulated less than £10,000 in pension wealth. In contrast, 20% have over £100,000 saved. Younger employees, particularly those aged 25 to 34, are more likely to have lower pension wealth, with nearly two-thirds in this group having less than £10,000. However, even among those aged 50 to 59, over 20% have less than £10,000 saved, while more than a quarter of this older group have over £250,000.
The relationship between earnings and pension wealth highlights the difficulties faced by lower-income earners in accumulating sufficient retirement savings. For example, employees earning less than £24,200 per year have a median pension wealth of just £1,800 between the ages of 25 and 34, compared to £278,000 for higher earners in their 50s. This significant disparity suggests that pension savings are closely tied to income levels, with higher earners accumulating far more over their working lives.
Pension contributions also vary widely, although there is less correlation between contribution rates and earnings, or age compared to wealth accumulation. Around 20% of private sector employees saving into DC pensions contribute no more than 4% of their total earnings, and over half contribute no more than 8%. On the other hand, nearly a quarter contribute more than 12% of their earnings. Older employees and higher earners tend to contribute a larger share of their income toward pensions, yet even among those earning in the top half of the income distribution, more than a third of employees aged 50 to 59 are contributing no more than 8% of their earnings. This raises concerns about whether these contributions will be sufficient to provide an adequate retirement income.
The issue of under-saving is widespread. According to the data, 27% of all private-sector employees are not saving into any pension, either because they are ineligible for automatic enrolment or have opted out. Younger workers, especially those aged 16 to 24, are more likely to be non-savers, as many have not yet become eligible for automatic enrolment. Women are also disproportionately represented among non-savers, largely due to lower earnings and higher rates of part-time work. Employees in the lowest quartile of the earnings distribution are particularly affected, with more than half not saving into a pension.
Projections of future retirement incomes paint a challenging picture. The analysis suggests that 57% of employees saving into DC pensions are on track to meet their target replacement rates, while 68% are projected to achieve the Pensions and Lifetime Savings Association (PLSA) minimum retirement living standard, currently set at £14,400 annually. This means that two in five employees are expected to fall short of their target replacement rates, and one in three are unlikely to meet the PLSA minimum standard. Lower-income earners are more likely to meet their target replacement rates than higher earners, primarily because the state pension makes up a larger portion of their income in retirement. However, achieving the PLSA minimum retirement living standard is much harder for low earners, who typically need to save more to reach this benchmark.
For higher earners, the challenge lies in replacing a sufficient proportion of their pre-retirement income. While 85% of employees in the bottom earnings quartile are on track to meet their replacement rate targets, only 38% are likely to achieve the PLSA minimum standard. By contrast, 90% of individuals in the top earnings quartile are expected to meet the PLSA standard, but only 40% will hit their target replacement rates. This disparity highlights the difficulty lower earners face in achieving the PLSA minimum retirement income, while higher earners may struggle to replace a large portion of their pre-retirement earnings.
Those forced to retire before the state pension age face even more difficulties. Early retirees are particularly unlikely to meet the PLSA minimum living standard, primarily due to insufficient savings and the need to draw down pension wealth before state pension age. As a result, their pension income is stretched thin, leading to financial shortfalls before they become eligible for the state pension.
As the pension landscape continues to evolve, current saving trends suggest that many employees are at risk of financial insecurity in retirement. The significant gap between those on track to meet retirement income goals and those falling short raises questions about whether automatic enrolment and current contribution rates are adequate to ensure a secure financial future for retirees. For many, particularly lower earners and those nearing retirement, a greater emphasis on increasing contributions and encouraging long-term savings is essential to bridge this gap and ensure a financially stable retirement.