The average pension pot required for a basic standard of living in retirement has surged by 60 per cent, from £68,300 in 2021-22 to £107,800 in 2023-24, according to new research by the Resolution Foundation, commissioned by the Living Wage Foundation [1]. The increase was driven primarily by the cost-of-living crisis which has pushed up the cost of securing an adequate income in retirement significantly.
The Living Wage Foundation commissioned the research to calculate the ‘Living Pension’ savings rate needed for a worker to be able to meet basic needs in retirement.
The research found that on average a worker needs an income of £19,300 a year in retirement to achieve a basic standard of living.
However, this varies from £13,500 to £28,400 depending on relationship status and housing tenure.
Single home owning pensioners would need £258 a week (or £13,500 annually) and pensioner couples that own their own home would need £395 a week (or £20,600 annually).
Those who don’t own their own home will need a substantially higher income: single pensioners who live in the private rented sector would need an additional £6,900 a year (£20,400) compared to a homeowner to achieve an acceptable standard of living.
When averaged out across different relationship statuses, housing tenures, genders and average life expectancy, the researchers calculated that the average pension pot size needed in addition to a full state pension to achieve an annual income of £19,300 in retirement is £107,800 for 2023-24.
The amount a worker on the real Living Wage needs to save to build up a pension pot of this size will vary depending on how many hours they work, how many years they work, the age they start saving at and their level of pay. Saving rates vary from 9-15.2 per cent for 25- to 35-year-olds depending on the hours they work and the age they start saving at, assuming they work to state pension age.
The Living Wage Foundation’s Living Pension accreditation, which is based on the research, is a voluntary savings target for employers who want to help workers build up a pension pot that will provide enough income to meet basic everyday needs in retirement. Living Pension Employers commit to providing a Living Pension savings level, using either a cash (£2,800) or percentage (12 per cent) target. There needs to be a minimum of 7 per cent, or £1,630, contribution from the employer.
After launching with six accredited employers in March 2023, the Living Pension movement has gone from strength to strength, welcoming its 50th employer, County Insurance, this week. Living Pension Employers include Aviva, SSE Plc and Newcastle Building society.
The news comes as polling of 3,000 people commissioned by Living Wage Foundation shows 53 per cent of UK adults saving into a pension felt they would never be able to retire, and 62 per cent felt they would have to work several years beyond retirement age. Despite falling inflation, these figures are largely unchanged since 2023 [2].
Low paid workers, women, and those living in rented accommodation had more negative feelings toward their retirement savings. The polling found:
· 65 per cent of workers paid below real Living Wage felt they would never be able to retire compared to 54 per cent of those paid the real Living Wage and 47 per cent earning above it.
· 58 per cent of women felt they would never be able to retire compared to 47 per cent of men.
· 59 per cent tenants felt they would never be able to retire compared to 48 per cent of homeowners.
The polling also found that around 1 in 10 workers saving into a pension had stopped or cut their contributions in the last six months, roughly unchanged since 2023, despite inflation falling. A higher proportion of low paid workers, women and renters cut their contributions compared to other groups. For example:
· 17 per cent of those paid less than the real Living Wage had stopped or cut their contributions compared to 10 per cent of those paid the real Living Wage and 6 per cent of those paid above it.
· 10 per cent of female workers cut or stopped their contributions compared to 8 per cent of male workers.
· 12 per cent of renters cut or stopped their contributions compared to 8 per cent of homeowners.
Previous research by Resolution Foundation has found that 4 in 5 workers paying into define contribution schemes are not saving at Living Pension levels and so may not be able to meet basic needs in retirement. The situation for low paid workers is even worse, with only 1 in 20 workers paid below the real Living Wage making adequate pension contributions.
Katherine Chapman, Director of Living Wage Foundation, said: “The news that workers now require a significantly larger pension pot to cover basic living costs in retirement will undoubtedly be alarming for many, particularly low paid workers who have borne the brunt of rising prices over the past two years. These workers are already struggling to make ends meet today, and the prospect of saving for the future feels even more daunting.
No one should have to choose between getting by today and securing their future. This is why we launched a Living Pension accreditation – helping employers ensure their staff can retire with dignity and without fear of poverty. We recently welcomed County Insurance as our 50th accredited Living Pension Employer, and we urge more businesses to join the movement. Together, we can build a future where everyone can look forward to retirement with confidence that they can meet everyday needs.”
Molly Broome, Economist at the Resolution Foundation, said: “While an increasing number of workers in the UK are saving for retirement, many low earners are not saving enough to achieve a minimum standard of living in retirement.
Both policy makers and businesses must look to address this challenge. By becoming Living Pension-accredited, employers can be part of the solution and help their staff towards a better income in retirement.”
Frazer Thomson, Group Pensions Manager at Living Pension Employer SSE Plc, said: “This research underpins the importance of individuals engaging with their pension savings, and the clear benefits of doing so early. Employers have a major role to play in supporting their employees’ pension savings. Making sure employees have adequate levels of contributions going in through Living Pension accreditation is a start, but employees need to understand the likely outcomes and impact on their retirement plans of the decisions they’re making today.
This research really helps highlight the importance of regular engagement with your pension savings, both in terms of how the targets can change over time, but also in the context of an individual’s circumstances which might also have changed since they last reviewed their pension planning. I’d encourage all employers to look at the contribution rates they’re supporting employees with, including the clear benefits of Living Pension accreditation, and the various ways they can work with their pension providers to make it easier for employees to review and understand their retirement planning.”
Katie, a worker who currently rents from a housing association, said: “I’m dreading retirement. I don’t want to work till I drop but it’s looking increasingly likely as I am unable to save much at the moment and can’t see that changing. Not all of us can afford to pay into a pension consistently and afford to live day-to-day. My rent has increased by around £28 a month, or £336 a year, at a time when I’m trying to get back on my feet. I was made homeless from private rented housing just before the pandemic and now live in housing association accommodation.
“Ultimately, I save far less than I’d like and it’s going to take me a great deal longer – we’re talking years – to get myself in a position where I feel stable, safe and could financially deal with anything that life throws at me. I only have very basic outgoings. I have caught up with the debt I inevitably had on leaving the benefits system and the missed payments I incurred because I just could not afford paying rent from my benefits as well as eating and keeping myself warm.
“Like the Cost of Living, not having my ducks in a row for my pension is affecting my mental health and peace of mind.”
Also commenting on these data, Lizzy Holliday, Director of Public Affairs and Policy at NOW: Pensions, said: “Today’s findings add to an already stark picture for retirees. Even to secure a basic retirement, you would need 60% more in pensions savings than three years ago. The report shows the cost-of-living crisis has not only reshaped our everyday but our futures too. Currently over 8.6 million people from underpensioned groups are missing out on workplace pension savings, leaving them at the greatest risk of falling into pension poverty.
“We urgently need a roadmap for the next stage of Auto Enrolment (AE) to ensure it supports pension adequacy. NOW: Pensions believes that a Roadmap should include reviewing the adequacy of AE contribution levels and the scope of AE, as well as an approach to implementing the AE Extension Act during the next Parliament. We welcome the consideration of adequacy in Part 2 of the Government’s Pensions Review which we hope will address these issues.”
