The Department for Work and Pensions has released the 'Framework for the analysis of future pension incomes' Report. Below is the Executive Summary. To view the report please click here.
Since the turn of the century, pensioner incomes have been increasing faster than earnings as a new generation of pensioners retires with occupational pension income. This fact, coupled with a more rapid increase in the level of pension benefits compared to working age benefits, has resulted in pensioner poverty being at its lowest level for 30 years.
However, there has been a fall in the number of people saving into occupational pension schemes over the last two decades, and a shift away from Defined Benefit to Defined Contribution pensions. This has been accompanied by lower contribution levels, leading to the prospect of lower incomes in retirement in the future.
The Government’s aim is to help people maintain their standards of living in later life through providing a firm yet affordable foundation from the state to support private saving. To achieve this, the Government is legislating to introduce a new state pension, is rolling out Automatic Enrolment into workplace pensions, and has brought forward increases to State Pension age.
This document shows that, based on a cautious set of assumptions about changes in future saving behaviour, the Government’s pension reforms will:
- Reduce the number of people facing inadequate retirement incomes by 1 million;
- Increase the incomes (and replacement rates) of 73 per cent of those facing inadequate retirement income, bringing them closer to their target income; and
- Halve the proportion of future pensioners who will retire with no private income at all from 27 per cent to 12 per cent in 2050.
With the Government’s reforms in place, over half of people currently of working age considered in our analysis are expected to build adequate retirement incomes and maintain their living standards during their retirement. However, this leaves an estimated 12.2 million people facing inadequate retirement incomes. Roughly half of these are within 20 per cent of their target amount, with the remainder facing a more significant challenge. This is a particular issue for moderate and higher earners.
It is likely that the impact of the Government’s major pension reforms will be greater than predicted as the modelling does not include the behavioural impacts of new policies, including the impact of the clarity of the single-tier state pension on private saving.
These estimates use the Pensions Commission benchmarks which give a good overall guide to how much income in retirement is needed to maintain living standards. However, the level of pension saving that is right for individuals, of course, will vary. This estimate of the number of people facing inadequate incomes is an update to that published in July 2012. It reflects new economic assumptions, an improved methodology for measuring couples’ income, and an adjustment to reflect different housing costs (more detail can be found in the technical annex).
The reasons people face inadequate retirement incomes vary between income
groups:
- Not working: for most low earners (earning up to £20,000 a year), the combination of the state pension and saving at the minimum contribution level into default funds through Automatic Enrolment will be enough to maintain similar living standards in retirement. For those low earners who face inadequate retirement incomes, the problem is mostly due to significant periods out of work.
- Not saving while in work: for moderate earners, the challenge is to ensure that they are saving for every year of working, and in some cases saving enough.
- Not saving enough: to ensure that they retire on at least half to two-thirds of their working age income, moderate and higher earners will need to save significantly more than the default Automatic Enrolment minimum combined contribution of 8 per cent of their earnings.
Given this, the responsibility lies with individuals to take action to ensure that they are building up the retirement incomes they desire. As people often find making the decisions necessary to achieve this difficult, there is a need for Government, alongside employers and the pensions industry, to help. The Government is working to restore confidence in the system so that individuals:
• do not opt out of automatic enrolment unnecessarily;
• save enough into their pensions; and
• get the most out of what they save into their pensions.
The Government is working with industry to enable savers to have more certainty in their pension outcomes.
This document provides an overview of projected future retirement incomes, in order to:
- look at the impacts of the Government pension reforms as a whole;
- identify where remaining challenges exist, and for whom; and
- recognise that these are long term challenges and we need to think about them well in advance.
We intend to update the modelling as evidence becomes available on the impact of Automatic Enrolment, the single-tier state pension, and State Pension age changes on work and saving.
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