The UK has an under-saving problem - here’s how you can beat it

IF you’re working in the private sector on a medium income, the chances are that you are chronically under-saving for your retirement.

That was but one of many grim findings in a recent report by the respected Institute for Fiscal Studies (IFS) into the UK’s pension system. The report showed that 61% of the middle-earning private sector employees who are contributing to a pension are saving less than 8% of their earnings, and 87% are saving less than the 15% - the level that a previous government commission said was necessary for an adequate standard of living in retirement.¹

Drilling down even further, the problem is particularly acute for those currently in their 40s. That’s because they have somewhat fallen through the cracks of the UK pension system - denied the more generous defined benefit pensions of older generations, but not young enough to benefit from the push to enrol workers into a company pension automatically early in their careers.

Faring worst of all are the self-employed, who don’t get to be enrolled into a company pension at all.

Making things yet more worrying are the trends for home ownership, which point to more people having to rent their home in retirement than was the case for previous generations. That means more will have to find money out of their income for housing costs.

And just in case that wasn’t enough bad news, assumptions for investment returns - which today's pension savers are relying on to grow their contributions - have been revised downwards. It never rains but it pours.

If you’re affected by any or all of these factors, summoning up the effort to get your pension saving on track can be a challenge. But fear not - there are some simple ways to tip things back in your favour and escape the retirement under-saving trap.

First - if you haven’t already, start saving, no matter how old you are or how much catching up you think you need to do. Most people with an employer will have been enrolled into a company pension already but if you’re self-employed, your earnings are too low or you opted out of your company scheme you might not have any kind of pension. If that’s you, seek out your company pension options or explore opening your own SIPP (self-invested personal pension).

Even if you think you won’t be able to save much at first, just start anyway. Saving is habit forming and you’ll have something to build on. Think of it like getting healthy after a period of being out of shape - you won’t be running marathons right away, but you’ll still benefit from taking a walk now and again.

Second - escalate what you’re putting in as time goes on. A key finding of the IFS was that people tend not to increase the percentage of their salary they contribute to pensions, despite starting at levels which probably won’t give them the retirement they want. A target of 15% of salary is often quoted - way above the 8% that many people auto-enrolled into a pension will start with.

Getting there can seem daunting - so do it in stages, not straightaway. If and when your income improves, consider how you could use it to boost your pension saving. If you get a 5% pay rise this year, keep 3% but divert 2% to a pension. You’ll still be taking home a higher cash amount but you’ll be helping your retirement income as well.

Finally, if a windfall comes your way - from inheritance, for example - could you use this to give your pension saving a one-off boost? Many in that position think first about paying off their mortgage, but if you’re on track to pay it off in time anyway, paying into a pension could be the wiser move.

All these options mean sacrificing money now for the future - never easy but particularly hard when our finances are being squeezed. But the difference it makes to your financial security in retirement is likely to be well worth it.

Source:

¹ Institute for Fiscal Studies, April 2023 - Challenges for the UK pension system: the case for a pensions review.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.