Interactive Investor

Retirement inequality at ‘shocking’ levels as defined contribution pensions take over

17th June 2022 10:38

Rebecca O'Connor from interactive investor

There are more people with pensions, but ONS data on retirement saving in Great Britain reveals bleak picture for some long-term pension investors.

The Office for National Statistics (ONS) has this morning published ‘Saving for Retirement in Great Britain: April 2018 to March 2020’, revealing the picture for long-term pension investors up to the beginning of the pandemic and national lockdowns. 
 
The data shows: 

  • Gold-plated defined benefit schemes are in terminal decline. For the first time, there were more people paying into a defined contribution pension (26%) than a defined benefit pension (23%) in the period. 
  • The top 10% of the population holds more pension wealth than the rest collectively. Between April 2018 and March 2020, the top decile of savers identified by the ONS held 64% of all private pension wealth, while the bottom five deciles held less than 1%. Median private pension wealth in the top decile was £637,500, compared with £0 in the first three deciles, £1,200 in decile 4 and £7,800 in decile 5. 
  • Median pension wealth among 55- to 64- year olds was £107,300, with around two-thirds of people in this age group still paying into a pension. One third (33%) of people aged 16 to 24 years had a pension worth £2,700 on average (median). Middle-aged people aged 45- to 54 were most likely to be paying into a pension (78%).  
  • One-third of people expect to retire with only the state pension. The state pension currently pays £9,627.80 - below the minimum standard of £10,900 suggested by the Pensions and Lifetime Savings Association for a basic living standard for a single person in retirement (£16,700 is the suggested basic minimum for a couple). This is equivalent to around 200,000 every year giving up work without enough money to cover the basics with their own income. 
  • More people below State Pension age (57%) had a private pension than before automatic enrolment was introduced in 2012 (43%) 
  • Self-employed workers, people with an illness or disability and ethnic minority ethnic groups, had lower average pension wealth than their counterparts because of lower participation rates and smaller pension pots. 
  • Being a low-income earner or not working at all were the most common reasons for not paying into a pension (54%). Self-employed people were more likely to say they could not afford to contribute (39% versus 26% employees) or preferred alternative forms of saving to pensions (17% versus 9% employees). 
  • Among working-age people, some groups had relatively low average wealth of any kind (for example, Black, Mixed or Other ethnic groups). Others had higher average net property wealth (for example, Asian and self-employed groups), that could offer an alternative source of income in retirement. 

Becky O’Connor, Head of Pensions and Savings, interactive investor, the pension and investment platform, said: “The UK is divided into pension ‘haves’ and ‘have nots’; the ‘have nots’ appear to outnumber the ‘haves’, and the gulf between them is so wide that the two groups have almost nothing in common when it comes to their experiences of retirement. The range is from £0 to a median amount of £637,500.  

“This level of inequality is quite shocking and demonstrates the need for further reform of pension policy. We quite clearly cannot generalise about ‘wealthy retirees’ or ‘the pensioner population’ when experiences are so disparate. 

“Although auto-enrolment has been successful, there are holes in it that certain groups such as low earners and self-employed people are falling through. 

“There is an urgent need to address the shortfall in income to cover basic living standards in retirement for hundreds of thousands of people who stop work every year.  

“In the short term, the cost of living crisis is going to push up the amount retired people need to afford enough food, energy and petrol this year by double digits potentially, yet the state pension is rising by just 3.1%. While some retirees will be able to cope, those without any private pension provision could find it impossible to cover their outgoings. 

“Longer term, the general trend away from generous guaranteed defined benefit pensions and towards defined contribution arrangements through auto-enrolment means that while there may be more people with pensions, the average amount of income that people have in retirement is set to fall significantly over time. 

“At this same time, costs for those entering retirement look set to get even higher, as more people retire with housing costs. Generally speaking, estimates for what people need in retirement assume housing costs have been paid off. But with more people renting privately and unable to buy, and even those with mortgages potentially having to pay them for longer, when people stop work, they could need substantially more in their pots. The unfortunate outlook is that many will have far less.” 

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.