The crisis of under saving for retirement could become catastrophically worse if a future Government axed the state pension triple lock, new official figures reveal.
Some 14.6million or 43 per cent of working people already face a sharp drop in living standards at retirement – but that estimate hinges on keeping the triple lock for the next 50 years.
Former Pensions Minister and partner at LCP Steve Webb found out the Government’s estimates for how much people would ‘under-save’ if the guarantee was axed and the state pension was increased according to earnings growth or inflation instead – and says they are ‘shocking’.
The number facing a dismal retirement could soar to 26.1million – a staggering 77 per cent of the working age population – if state pension rises are linked to prices again, as they were before 2010.
Steve Webb: We are living in a bit of a ‘fool’s paradise’ with regard to the scale of the under-saving crisis
If annual rises are based on wage increases, 19million people could struggle financially in old age, or 56 per cent of today’s workers.
The figures are a stark reminder of how much people depend on the triple lock, under which the state pension is raised by the highest of inflation, average earnings growth or 2.5 per cent.
‘Very few people expect the triple lock to continue for another fifty years, yet this is the basis on which the Government has so far published estimates,’ says Webb.
‘We are living in a bit of a “fool’s paradise” with regard to the scale of the under-saving crisis – something that a Budget tax raid on pensions via a cap on salary sacrifice is likely to make worse.’
The previously unpublished figures forecasting the potential state of under-saving for retirement were obtained by Webb under a freedom of information request.
He says a prices link to annual state pension rises – used until the Coalition government introduced the triple lock in 2010 – would see around one in three of today’s workers retiring short of even a bare ‘minimum’ standard of living.
‘Against this backdrop, the Chancellor should be taking measures in the Budget to boost pension saving, not undermine it,’ says Webb, who is This is Money’s retirement columnist.
How much is the shortfall in retirement saving?
Under-saving rates depend on what benchmark for a decent retirement you use and different assumptions about state pension increases.
A ‘target replacement rate’ means lower earners should be able to replace 80 per cent of their old income, middle earners 67 per cent and the highest earners 50 per cent.
But under the widely cited Pensions UK retirement living standards forecasts, which are calculated according to what lifestyles people aspire to in old age, an individual needs £13,400 and a couple £21,600 for a basic income.
That rises to £31,700 and £43,900 respectively for a moderate income. The figures do not include tax, housing or future care costs.
The table below shows the Department for Work and Pensions’ estimates for how many individuals are under saving relative to these three benchmarks.
The estimates are based on its figure published last July where the triple lock continues indefinitely, and on linking state pension rises to average earnings growth or CPI inflation instead.
| How annual state pension rise is calculated | Target replacement rate (80%, 67% or 50% of earnings before retirement) | Pensions UK minimum retirement | Pensions UK moderate retirement |
|---|---|---|---|
| Triple lock | 14.6m workers under saving for old age | 4.6m | 25.4m |
| Average earning growth | 19.0m | 6.0m | 26.0m |
| CPI inflation | 26.1m | 11.7m | 28.8m |
| Triple lock figures from Government figures here. Other figures from Steve Webb ‘s freedom of information request and his calculations | |||
Webb says the official figures benchmark individuals’ forecast retirement income against the Pensions UK standard for a single person, and retired couples may have a better standard of living due to sharing costs.
But he adds: ‘With the new state pension providing little support for widows and widowers, these people may still struggle in later retirement when they are living on their own.’
Webb says: ‘These numbers not only inform the debate about the future of the triple lock but also the forthcoming Budget, where it is widely rumoured that the Chancellor will raise up to £2billion by cutting back on workplace ‘salary sacrifice’ schemes for pensions.
‘Such a measure would further undermine pension saving when these figures show that the true state of under-saving is already far greater than previously revealed.’
How safe is the triple lock?
The current Government has committed to keeping the triple lock for the whole of this parliament. That means the current full flat rate state pension will increase from £230.25 at present to £241.40 a week from next April.
The state pension, which is currently worth around £12,000 a year if you get the full amount, is guaranteed until you die – like traditional final salary pensions, which have been phased out in the private sector.
New defined contribution pensions are stingier and savers bear the investment risk when building the fund, and often when living on it too unless they buy an annuity.
That means the next generations of retirees are likely to be as reliant on the state pension if not more so than previous ones.
Annual rises: Here’s how the triple lock has boosted state pension payments since April 2011
Critics point out that maintaining the triple lock is expensive when public finances are in a straitened state.
The Institute of Fiscal Studies says it is now costing the Government £12billion extra a year, and suggests moving to the Australian system of a ‘smoothed earnings link’ after the next election.
It argues the triple lock is costly, difficult to forecast over the long term, and disproportionately beneficial to better off people who tend to live longer.
Supporters say pensioners have to struggle with the very real challenge of inflation while on a fixed income.
The UK also has the lowest state pension among rich countries based on one of the most cited international measures, although that does not tell the whole story because some nations roll their state and workplace schemes into one system.
Meanwhile, older people tend to vote in high numbers. None of the major political parties have shown an inclination to upset this key voting bloc by denying them a decent state pension increase.
How to sort out your pension if you fear it’s falling short
1) If you are worried about whether you will have saved enough, investigate your existing pensions. Broadly speaking, you need to ask schemes the following questions.
– The current fund value.
– The current transfer value – because there might be a penalty to move.
– Whether the pension is in a final salary or defined contribution scheme. Defined contribution pensions take contributions from both employer and employee and invest them to provide a pot of money at retirement.
Unless you work in the public sector, they have now mostly replaced more generous gold-plated defined benefit – career average or final salary – pensions, which provide a guaranteed income after retirement until you die.
Defined contribution pensions are stingier and savers bear the investment risk, rather than employers.
– If there are any guarantees – for instance, a guaranteed annuity rate – and if you would lose them if you moved the fund.
– The pension projection at retirement age. You can use a pension calculator to see if you will have enough – these are widely available online.
2) You should add the forecast figures to what you anticipate getting in state pension, which is currently £230.25 a week or nearly £12,000 a year if you qualify for the full new rate. Get a state pension forecast here.
3) If you are tempted to merge your old pensions, read our guide first to ensure you won’t be penalised.
4) If you have lost track of old pots, the Government’s free pension tracing service is here.
Take care if you do an online search for the Pension Tracing Service as many companies using similar names will pop up in the results.
These will also offer to look for your pension, but try to charge or flog you other services, and could be fraudulent.
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