Understanding Pensions in an Era of Disruption

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Report highlights

 

This report produced by Retail Economics in partnership with Nutmeg offers guidance for consumers (current and future retirees) on the level of savings and income required for retirement nowadays. This research can also be used to support financial providers in helping them improve business strategies and to better engage clients. Using consumer panel research and ONS data, a calculation is presented for the shortfall between current pension pot values and the income needed for a comfortable retirement.

 

The report is divided into 5 main sections:

• Part 1: Introduction

• Part 2: Key Stats

• Part 3: The UK Pension Landscape

• Part 4: The Pension Deficit

• Part 5: Plugging the Pension Gap

 

 

Introduction

In a disruptive world seemingly transitioning from one crisis to another, achieving financial security in retirement has become paramount. Against a backdrop of high inflation, stock market volatility, rising interest rates and geopolitical instability, the savings process has become more uncertain. As  households grapple with immediate financial concerns, today’s cost-of-living crisis risks becoming tomorrow’s pensions crisis. 

While significant progress has been made to boost pension contributions and engagement, optimal retirement income appears out of reach for many. Faced with soaring bills and the potential of an oncoming recession, people may be tempted to ‘batten down the hatches’ by reducing pension contributions, reviewing investment mix, withdrawing lump sums, or even putting off starting a pension in the first place. Without significant support, those on lower incomes and already under-pensioned are likely to struggle to achieve a balance between meeting short-term and long-term financial needs.

Delaying saving for retirement ignores the already troubling direction of travel. Currently in the UK, the average 65-year-old has a pension deficit of £271,000 – the difference between actual pension pot values and what is needed to enjoy a comfortable retirement. Extrapolated across the population, this equates to a total pension under provision of £187 billion for those on the cusp of retirement.

A decade on from the introduction of automatic enrolment and seven years after Pension Freedom reform, this report produced by Nutmeg in partnership with Retail Economics provides penetrating insight on pension provision in the UK amid the unfolding cost-of-living crisis. It identifies different ‘pension personas’ and looks at attitudes and behaviours that shape how people perceive pensions and save for retirement.

Insight from this research offers guidance for consumers (current and future retirees) on the level of savings and income required for
retirement. This research can also be used to support financial providers in helping them improve business strategies and to better
engage clients. Lastly, using consumer panel research and data from the Office of National Statistics (ONS), a calculation is presented for the shortfall between current pension pot values and the income needed for a comfortable retirement.

 

The report is split into three sections:

The UK pension landscape: provides an overview of pension provision and the underlying drivers of retirement saving, including identifying the five main pension personas.

The Pension Deficit: quantifies the shortfall between current pension pot values and the income needed to live a comfortable retirement. 

Plugging the pension gap: identifies key strategies and tools for consumers to increase pension engagement to achieve a stronger financial position for retirement.

 

Key stats

 

The UK Pension Landscape

This section provides an overview of the UK pensions landscape. It explores the key drivers of pension provision, the retirement savings journey, and characteristics of different consumer archetypes including their attitudes, motivations and behaviours around pensions.

The current pensions landscape

An alarming proportion of the UK population are without a private pension, heading towards retirement without adequate financial provisions in place.

Our research shows that around 3 in 10 (29%) UK adults have no private pension savings. For those aged 65+, who are on the cusp of retirement, as many as a third (32%) do not have a private pension leaving the vast majority reliant on just a state pension to provide for them through later life.

With so many retirees dependent upon government for financial support in their senior years, expectations of a ‘comfortable retirement’ are under threat – especially in the context of a cost-of-living crisis, as everyday living expenses like food and energy soar.

Figure 1: Proportion of individuals with no private pension wealth

Source: ONS Wealth and Assets Survey

The UK has seen a marked improvement in private pension provision over the last decade as the introduction of the automatic enrolment scheme encouraged millions into saving for retirement. The scheme’s success lies in the fact that saving becomes the default option, reducing the proportion of ‘non-savers’ as action is required for them to opt-out.

While auto-enrolment may have overcome the largest barrier of inertia by simply getting people to start saving, this default option requires limited active decision making, hence lessens engagement among many pension savers. However, with the auto-enrolment minimums unlikely to be sufficient to provide for a comfortable retirement, it could lure some into a false sense of security. More progress is needed to educate, motivate and improve engagement, if people are to enjoy the level of comfort and security they want in retirement.

Indeed, our research shows that a quarter of pension savers have no idea what their pension pot is worth. More than half (59%) of UK employees don’t know how much they (or their employer) contribute to their pension; while two in five (40%) don’t realise they... [extract].

 

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Too often there is a disconnect between pension schemes and their members. This fuels uncertainty. Almost two thirds (62%) of pension savers say they have no idea whether they are contributing enough; and half (53%) worry about having enough income to see them into their retirement.

Different types of employment affect pension saving behaviour. Workplace pension schemes are designed for traditional working patterns. This can negatively impact employees who take significant career breaks, work part-time, are on short-term contracts, or have multiple jobs.

Certain demographics are disproportionately impacted. Women, ethnic minorities, the disabled, and those on low-incomes are more likely to be in unconventional, temporary or insecure forms of employment. This makes the savings journey to a comfortable retirement more challenging