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Even Britain’s higher earners can expect to see a drop in living standards when they retire, with the average shortfall between the annual income they require and what their pension will afford them almost doubling in the past five years.
The top 20 per cent of households in terms of earnings — those with salaries above about £87,000 — now face an average pension fund shortfall of more than £64,800 from the amount required to maintain their living standards. This is according to a savings and resilience barometer, an analysis done in partnership between Oxford Economics, a consultancy, and investment platform Hargreaves Lansdown. That shows an increase from an average of £35,786 between 2018 and early 2020, assuming retirees withdraw 4 per cent from their pension pot per year.
For higher earners, the barometer recommends that payments out of a pension cover 50 per cent of pre-retirement earnings to maintain living standards, known as the target replacement rate.
“We think the government needs to look at how it incentivises higher earners to save so they understand they need to go above the auto-enrolment minimums,” said Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.
The pensions shortfall — known as the pensions gap — has risen more among higher earners than other income brackets as savings rates and pension fund performance and income have failed to keep pace with a surge in retirement costs.
Those without pension savings are more reliant on the state pension, which rises each year in line with inflation, average earnings or 2.5 per cent, whichever is highest.
“Lots of higher earners are on course for lower pensions than in the past,” said Sir Steve Webb, a former pensions minister and partner at consultancy LCP. “The relative inadequacy of DC saving is clearly a concern for people of all incomes,” he added. However, he noted that higher earners were more likely to have other assets, such as from individual savings accounts; so just looking at pension projections could overstate the problem.
Calls for higher auto-enrolment rates come as the government has revived its Pensions Commission, last seen in the early 2000s, to examine options to boost pension savings and broaden the number of people setting money aside for retirement.
Under current auto-enrolment rules, staff and employers combined must pay at least 8 per cent of qualifying earnings into workplace pensions each year, with a minimum of 3 per cent coming from employers.
The Pensions Commission has been instructed to submit its final report to the government in 2027. Sensitive to cost of living pressures faced by many workers, Labour has said it would not increase auto-enrolment rates in the current parliament.
Research from the Institute for Fiscal Studies think-tank carried out last year found that 30 to 40 per cent of private sector employees — 5mn to 7mn people — saving in defined contribution funds are on course to have individual incomes that fall short of standard benchmarks in retirement, but prospects looked better accounting for partners’ pensions and potential future inheritances.