More than 60% of households are not on track to have a moderate income in retirement, research by Hargreaves Lansdown has found, leading to calls for more to be done to help people build up their pension pots.
In its latest Savings and Resilience Barometer, the platform revealed that the average single person will need an income of £25,000 a year for a ‘moderate’ retirement. At the same time, a couple will require £36,480 between them.
When calculating these income needs, Hargreaves Lansdown took the 2023 estimate for a moderate retirement from the Pensions and Lifetime Savings Association (PLSA) and increased them by 7.3% – the headline inflation rate over the past year.
The updated estimate from the PLSA has an even higher income requirement for a moderate retirement: £31,300 per year for a single person and £43,000 for a couple. This is because the association added more aspirational areas such as the desire to spend more time with family post-pandemic into its methodology.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “These things will be important to many, but not all people, and many live well in retirement on far less.
“Even adopting a smaller increase exposes the huge challenges people face in planning for retirement. Only 38% of households are on track for a moderate income in retirement – there is clearly much work still to be done to improve pension adequacy.”
The investment platform found 12.2 million households do not have the pension savings required to retire with a moderate living standard. But within this group, almost 7 million have excess cash or investments that could be used to boost their pensions or SIPPs.
“It’s a simple shift that could see 1.8m households passing the threshold for a moderate retirement income and securing their financial future, while the outlook for the remaining households would be significantly improved,” Morrissey added.
Hargreaves Lansdown also thinks government reforms are crucial to further address the retirement savings gap. The anticipated auto-enrolment extension bill is a key initiative, which, upon implementation, will allow individuals to enrol from age 18 and make contributions from their first pound earned, potentially boosting their pension savings significantly over time.
Additional reforms could encourage employers to increase their contributions to employees’ pensions, the platform said. For instance, making employers match the increased contributions of employees who opt to contribute more than the minimum required.
The situation for the self-employed also demands attention, Hargreaves Lansdown finished. This group often avoids traditional pensions due to perceived inflexibility, making alternatives like a Lifetime ISA for this group more appealing due to its 25% government bonus on contributions up to £4,000 annually, with tax-free income upon withdrawal.
However, the 25% penalty for early access reduces the overall benefit, prompting calls for this penalty to be lowered to 20%. Such a change would prevent individuals from being unduly penalised for accessing their funds early.
Furthermore, extending the upper age limit for Lifetime ISA contributions from 40 to 55 could significantly aid those who become self-employed later in life, providing them an additional tool to prepare for retirement.