Current state of savings in the UK declared ‘precarious’

However, Scottish Widows warns that “the current state of the nation’s savings is still precarious”.And its Retirement Report adds that boosting auto-enrolment contributions would drive pension poverty down to just 13 per cent.

The NRF projects retirement outcomes based on savings, behaviours and income sources, comparing expected income to potential living and housing costs in retirement.

Better retirement outcomes driven by falling housing and energy costs

According to Scottish Widows, the reduction in the percentage of people facing pension poverty has been driven by two key factors.

Firstly, those not saving in the traditional way through a pension have increased their level of savings elsewhere, and more of those also now expect to own their own home when they retire.

Secondly, falling energy costs in the short-term have led to more people meeting the minimum lifestyle standard as set out by Pensions UK’s Retirement Living Standards.

However, with recent global events pushing energy costs back on an upward trajectory, this positive progress could soon be undone, Scottish Widows cautions.Pete Glancy, head of pension policy at Scottish Widows, says: “This report paints a complex picture. While the fall in pension poverty compared to a year ago is a step in the right direction, this shift in retirement fortunes is complex and the current state of the nation’s savings is still polarised.

“The factors we can control, like how much we save or how much we expect to receive in retirement, may improve, but can easily be thrown off course by shifting external factors like increases to energy and general cost of living.”

Scottish Widows recommends the UK Government adopts the following policy measures to improve retirement saving prospects in Britain:

◆ Increase the statutory level of saving through auto-enrolment from 8 per cent to 12 per cent.

◆ Create an equivalent of auto-enrolment for the self-employed sector.

◆ Accelerated compatibility between pensions and personal financial products –savings, investments, housing equity – to facilitate better retirement journeys.

Increasing the auto-enrolment contribution rate

Automatic enrolment is an important tool to help more people have at least a basic lifestyle in retirement –especially for those on low to middle incomes, says Scottish Widows.

The pensions provider and life insurer calculates that increasing default contribution rates would have a sizable impact on the pension pots of those currently saving, especially for young people. It says raising total contribution rates from 8 per cent to12 per cent on the first £30,000 of salary would increase projected retirement savings by £40,000 on average.For those aged 22 to 29, the impact is far greater, increasing pots to around £114,000 at retirement.

Scottish Widows’ analysis also shows that should the statutory level of contribution through auto-enrolment increase to12 per cent across total salaries among defined contribution (DC) members saving below 12 per cent would drastically reduce pension poverty from 32 per cent to 13 per cent, seeing an additional £65,000 in pension pots.

If the auto-enrolment rise were applied only to the first £50,000 of salary, the average pot would increase by £55,000, with pensioner poverty also being reduced dramatically to 14 per cent.

Scottish Widows adds that the remaining 13 per cent at risk of pension poverty are mainly self-employed, part-time or unemployed people.

Therefore, extending auto-enrolment could significantly improve the nation’s retirement outcomes. This is especially important as the UK’s 4.39 million self-employed and many of the 8.79 million part-time workers, who are currently excluded from auto-enrolment, are more likely to face pension poverty, with around a third in each group experiencing a “below-minimum” retirement lifestyle.

Pete adds: “The way people are working continues to evolve, but our retirement system still lags behind. This year, we have modelled the impact of some policy changes only on the youngest workers as this gives us the best indication of the long-term benefit applying not only to them, but all future generations yet to join the workforce.

“We must also ensure that choosing flexibility today - through self-employment or part-time work - doesn’t come at the expense of tomorrow. Extending auto-enrolment to the self-employed, as is one of our recommendations to the Pension Commission, is critical and should be implemented at pace to close this gap in retirement saving.

“Most people are unlikely to have enough in their pension pots alone to fund their desired retirement, so pensions can no longer be viewed in isolation.

“Considering pensions alongside other savings, investments and housing wealth - and advancing the government’s Open Finance agenda - will be key to improving retirement outcomes for all.”

Responding to the report, Joe Brunt, managing director of Fast Loan UK –which aims to make borrowing faster for Brits – comments: “Scottish Widows’ research lays bare a pension poverty crisis that millions of older Britons are already living through.

“Our data shows that the people asking to borrow the most are those in their 70s and beyond, the very group you’d expect to be financially settled. Instead, they’re turning to loan providers to cover home repairs, everyday costs and one-off expenses.

“The Pension Schemes Act may help tomorrow’s retirees, but today’s over-70s have nowhere to turn.”Fast Loan UK analysis revealed that Brits aged 70 to 74 request an average loan of £623, 22 per cent above the national average of £513. The 75-plus age group requested even more, averaging £648 per application.

Department of Work and Pensions reports

Also this month, the DWP published a new study - Life Courses and Pension Saving Patterns, which explores how labour market histories and life events are associated with pension saving in the UK. And how different labour market patterns translate into variations in retirement outcomes in later life.

It found that:

◆ Under the current private pension system, certain groups are at risk of accumulating little or no private pensions over their working-age life – especially those with long spells of non-employment or self-employment, and to a lesser extent those mostly in part-time work.

◆ Sustained periods of non-employment or part-time work are particularly common among women –especially those from ethnic minorities – and other groups that tend to be more disadvantaged by a number of factors, such as those who report being disabled in their later working life.

◆ While some of the differences in pension participation have narrowed since 2012 due to automatic enrolment, as long as significant differences in labour market patterns exist, automatic enrolment policies on their own cannot eliminate differences in pension saving between groups.

◆ Differences in pension saving patterns also translate into differences in retirement outcomes.

◆ Average retirement incomes for groups that have lower labour market attachment and private pension saving are higher once partners’ incomes are included, making the gaps between groups smaller. But marriages and partnerships can end due to divorce, separation or bereavement, which can expose people – in particular women – to lower resources in later life.

◆ Life events such as having a child, relationship breakdown, or changing housing tenure, tend to have a limited effect on pension participation or changes in contribution rates for people who remain private sector employees. However, they can still impact the amount people save in private pensions.

Commenting on the DWP report, Adam Cole, retirement specialist at Quilter, says: “This research, which will feed into the evidence base for the Pensions Commission, reinforces that pension outcomes are still overwhelmingly shaped by the stability of people’s working lives rather than by engagement with saving.

“Over a 15‑year period, only 49 per cent of those born between 1974 and 1988 were in full‑time work more than 75 per cent of the time. At the same time, around 11 per cent were mostly out of paid work, 10 per cent were mainly in part‑time roles, and 7 per cent were predominantly self‑employed – all patterns that make it far harder to build consistent private pension contributions over time.”

He points out that the disparities are particularly stark for women. In the same cohort, just 33 per cent of women spent more than three‑quarters of the period in full‑time employment, compared with 67 per cent of men.

Adam explains: “Women were far more likely to be mostly part‑time or mostly out of paid work, reflecting caring responsibilities and career interruptions that continue to translate directly into lower private pension accumulation. Until this structural inequality is addressed then pension inequality will always follow.”

He adds: “One of the most revealing findings is that life events themselves are not the main driver of pension behaviour. For people who remain private‑sector employees, events such as having children or relationship changes have limited direct impact on whether they save or how much they contribute.

“The real divergence opens up when those events change hours, earnings or whether someone is in paid work at all. This is particularly evident after the birth of a first child, where pension saving paths for men and women begin to separate almost entirely because of changes in working patterns rather than different contribution choices.”