Two in five Brits won’t be able to cover basic costs in retirement

Nearly 40% of Brits are set to struggle to meet basic needs when they retire, according to the latest National Retirement Forecast (NRF) from Scottish Widows.

A startlingly high proportion of Brits may not be saving enough into their pension to meet the living standards they want – or need – during retirement.

While retiring comfortably is the ultimate goal for many, even covering basic needs could be out of reach for millions of Brits.

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Pensions UK – formerly the Pensions and Lifetime Savings Association – defines three categories of lifestyle in retirement according to the level of income that the retiree has: Minimum.Moderate and Comfortable.

The Minimum level “covers all your needs, with some left over for fun”. Pensions UK estimates that a single person needs £13,400 per annum for this lifestyle.

But the latest NRF report shows 39% of Brits – effectively two in every five – will be unable to generate even this level of income through their pension and other income sources when they retire. These 15.3 million people risk not being able to cover basic needs during their golden years.

“There is a clear need to help people understand how much they will need to cover their living costs in retirement, how much their projected pension is, and how to take action if needed,” said Pete Glancy, head of pensions policy at Scottish Widows.

The barriers to an affordable retirement

The findings show that 27% of people are worried that they will have to work longer than they would like to in order to be able to afford to retire, with 15% indicating that they don’t think they will ever be able to.

Among low- to middle-income earners, 60% face a drop of 60% or more in income when they retire.

The NRF noted that housing costs are a significant barrier to meeting basic retirement outcomes. Persistent inflation over the two years that Scottish Widows has run the report has also driven an increase in the proportion of people facing poverty in retirement, from 35% in 2023.

Millions of Brits aren’t contributing enough to their pensions pots for retirement to be affordable. Of those saving approximately the default auto-enrolent contribution level, 48% are on course for a ‘minimum’ level of comfort in retirement, while 35% risk falling short of this.

“Cracks are beginning to show in the system, and they must be addressed urgently if we are to maintain faith in the UK’s pension framework and ensure people are equipped not just to survive, but to thrive in later life,” said Rebecca Williams, divisional lead of financial planning at Rathbones.

The NRF notes, though, that automatic enrolment has been a “gamechanger” and helped to deliver at least a basic level of comfort in retirement for many. The report calls for the government to go further with targeted automatic enrolment reform during its ongoing Pensions Review, including creating an equivalent of auto-enrolment for self-employed workers.

“We’re calling on the government to lower the auto-enrolment age to 18 and scrap the £10,000 earnings threshold, so more young, part-time, and self-employed workers who are currently excluded, can start saving for a better retirement,” said Glancy.

The report also found that people enrolled onto a defined benefit pension scheme were the least likely to be unable to afford the costs of retirement. Of this category, 4% were set for a less-than-minimum standard of living in retirement, compared to 20% of those on defined contribution schemes and 75% of those not contributing towards a pension.

Change in state pension age could cost retirees nearly £18,000

Other reforms under consideration in the Pensions Review include potentially bringing revisions to the state pension age through sooner.

Currently, the age at which you qualify for a state pension is 66, rising to 67 by April 2028 and 68 between 2044-2046. But a review finishing in 2029 could change this second rise to 2039-41 instead.

Bringing the revision in sooner would mean one extra year of ineligibility for state pensioners. Factoring in the triple lock, which guarantees at least a 2.5% annual increase to the value of a state pension, that extra year would reduce the state pension received by workers now aged 51 by £17,774 each.

“With longevity increasing and population pressures mounting, future generations appear set to face a less generous state pension regime than that enjoyed by many of today’s retirees,” said Williams.

“The state pension alone is not enough for a comfortable retirement. Individuals need a broad foundation built on workplace pensions, private savings, and the ongoing support of pension tax relief."

Millions can’t achieve financial independence

The report also found that a quarter of Brits (25%) don’t feel financially independent. Of this number, 44% didn’t think they ever would.

Thirty-seven per cent of these didn’t feel confident that they could cover a financial emergency, and 35% said that they weren’t confident they could save enough for retirement.

This highlights the importance of all-round financial awareness and education. While many view financial independence as a means to retire early, it can also make a big difference to the quality of life enjoyed during that retirement.

“Pensions should never be looked at in isolation,” said Glancy. “Accounting for goals like building emergency savings, housing security and considering other types of investments for the future is also key.”