Better financial education key to encouraging UK pension saving, says expert

Analysis published by the Department of Work and Pensions (DWP) found that approximately 11.9 million UK adults below the state pension age (SPA) were not currently saving enough to provide them with an adequate retirement income. However, almost half of those were "on the right savings path", being almost 80% of the way towards achieving their target retirement income.

"These figures demonstrate just how important it is to encourage pensions saving," said pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com.

"Auto-enrolment has proved successful at getting more people into pensions saving, but there is still a long way to go to ensure people are saving enough. We need more financial education, both in schools and the workplace, to ensure that people build up the savings that are needed to give them a decent income on retirement," he said.

The research uncovered three main factors leading to poor retirement income prospects, each of which tended to apply to different types of workers. Insufficient saving among lower-income workers tended to be caused by not having a full work history, resulting in a reduced entitlement to the state pension due to insufficient National Insurance contributions (NICs) and a reduced capacity for private pension saving. Middle-income workers were most guilty of not contributing to private pensions while in work, while higher income workers tended not to contribute enough to their pensions to generate a large enough retirement income.

The government's pension reforms, including the impact of automatically enrolling eligible workers into occupational pension schemes and reforms to the state pension, were beginning to impact positively on lower earners, according to the research. Instead, it was people in the middle and higher income groups who were now tending to under-save, which the government defines by looking at expected retirement income as a percentage of working age income. Lower earners should aim for an 80% income replacement target, while the highest earners need 50% of their working-age income on retirement.

One way in which this could be addressed would be to raise statutory minimum contribution rates, the DWP said. However, doing so would require careful balancing to ensure that lower earners did not end up paying so much that they would be encouraged to opt out of workplace pensions entirely. On this basis, the DWP said that "further work" on contribution rates was needed in order to balance better retirement incomes for all with a sufficient working life income.

"This coalition government's sweeping reforms of the pensions system will make a huge difference to the long-term financial prospects of most working age people," said Steve Webb, the pensions minister. "But while the state will always provide a decent safety net so people can get by, anyone wanting to see their standard of living maintained into old age needs to make their own provision too."

"This new research shows that by saving just a little more, a huge number of working people could make their future retirement so much more comfortable," he said.

A new flat rate single tier state pension, set above the means test and based on 35 years of NICs, is due to replace the current system from April 2017. The 'triple lock', introduced by the government in 2010, guarantees that the state pension will rise each year by whichever is the highest out of earnings, prices or 2.5%. The government's automatic enrolment programme, through which up to nine million people will begin saving more towards their retirement or saving for the first time, has also helped low earners, according to the report.