Career ‘pension gaps’ could reduce average worker’s retirement pot by six-figure sums, new report finds

Workers could be losing out on six-figure sums due to pension gaps, a new report by the Institute and Faculty of Actuaries (IFoA) has found. 

By making certain career decisions, people could be losing out on a comfortable retirement, the chartered professional body’s ‘How much could you lose?’ report has shown. For example, by failing to take advantage of their employer’s maximum pension contributions, the average employee could be missing out on a significant amount of ‘free money’.

Most firms auto-enrol their employees at the legal minimum salary contribution rate of 8% (3% from the employer, 5% from the employee). However, some companies offer a higher rate if the worker opts to contribute a higher proportion of their earnings.

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According to the IFoA, missing out on just an additional 1% from an employer over 40 years could reduce a typical pension pot by £100,000. It has also highlighted the other choices people could make that could see them lose out on a large sum of retirement income.

The body has based its calculations on a starting pensionable salary of £28,000, with annual average salary growth of 4% and an average return of 6% per year. The research also assumed that the typical employee in its scenario has a 10% contributions rate. Over a 40-year career, these conditions would create a pension pot totalling £800,000.

The report comes as the new Labour government has been conducting a major review into private pensions. Experts have called on Sir Keir Starmer’s administration to boost auto-enrolment contribution rates. The pensions industry has also urged people to do more to plan for retirement through a tongue-in-cheek advert featuring Towie star Gemma Collins.

Meanwhile, ahead of her Budget next month, Rachel Reeves is understood to be weighing up cuts to pension tax relief. The Chancellor is also coming under increasing pressure from her own MPs to change her plans to scrap Winter Fuel Payments for most pensioners.

IFoA: workers could lose ‘staggering’ amounts from pension gaps

As well as failing to take advantage of maximum employer contributions, workers could lose further six-figure sums depending on how they approach major life decisions, the IFoA has found. For example, its report showed that starting a pension at 35 instead of 25-years-old could deprive the average pot of £300,000 by retirement.

With more than four million self-employed people not having ready access to automatic enrolment, the professional body has urged the government to do more to support the potentially pension-less. Failure to do so could lead to a pensions gap, it has warned.

The report has also shown that if a full-time worker opts out of their workplace pension scheme for five years between the ages of 55 and 60, their retirement pot could reduce by £100,000. The impact of opting out gets bigger, the younger the employee is. For example, missing five years of contributions between the ages of 35 and 40 could cost a pension £206,000.

It comes as the IFoA’s analysis of Department for Work and Pensions (DWP) figures from August 2022 found more than 10% of newly-enrolled employees were choosing to opt out, potentially in a bid to boost their immediate earnings.

Taking a career break is another move that can prove to be a setback for your pension. Pausing contributions for just six months, say for parental leave, could slash your pot’s eventual total by £30,000 or more.

Likewise, going part-time during the second-half of your career could deprive your pension of a significant amount of cash. Moving to a three-day week for 25 years could mean you end up paying in 40% less in contributions, costing you £200,000 by retirement. This is an issue which particularly affects women, according to IFoA analysis of Office for National Statistics (ONS) data. The January 2024 ‘Labour Force Survey’ showed 5.1 million women were on part-time hours compared to 1.7 million men. This could be for several reasons, including reducing childcare costs.

The IFoA also pinpointed divorce as a key life event that could deprive people of a large chunk of retirement savings. It said failing to consider pensions in a divorce settlement could leave one of the parties “hundreds of thousands of pounds” short - especially given men typically have a 30% bigger pension pot than women.

Commenting on the findings, IFoA Pensions Gap working party member, Alexandra Miles, said: “It is concerning that an individual could stand to lose a staggering amount of money during some of the most significant moments of their lives. On top of this, they may be largely unaware of these hidden costs and the drastic impact that short-term decisions can have on their pension savings over the long-term. Some may be faced with multiple significant moments throughout their lifetime, further compounding the issue.

“We have the data and have run the analysis that shows the extent of the pension gap problem, we must now act on it to further explore and overcome the hurdles - structural and attitudinal - that people face when saving for their retirement. In this research we have tailored recommendations to governments, employers and individuals. At the heart of the recommendations is a call for truly equitable and long-term policies, and the structural support that can make a difference in practice, ensuring that people feel more in control at the key life moments that matter for pensions.”

Government action needed to close pension gaps, IFoA says

In a bid to prevent the pension deficits outlined above, the IFoA has drawn up several recommendations for government, individuals and firms.

On the policy front, the body said it wanted the DWP to look at how to avert pensions gaps. For example, it recommended that publicly-run guidance and information support services, such as Pension Wise, have pensions gaps as a “specific focus”. It also urged the government to explore household pension plans and review pensions tax relief, given basic-rate taxpayers pay £80 to contribute £100 to their pensions, while higher-rate taxpayers only pay £60 for the same amount.

It said the DWP should “reinvigorate” its messaging around pension savings rates and review legal minimum auto-enrolment contribution levels. It has advised ministers to come up with an auto-enrolment solution for self-employed workers.

When it comes to actions individuals should take, the IFoA recommended that people should calculate how much money they will need for a comfortable retirement, and assess whether their current pension savings rate puts them on target for this figure. It also said pensions should not be forgotten at key life moments, such as having children, starting a new job, or going part-time.

The body urged employers to ensure their policies don’t “unfairly accentuate” pensions gaps when it comes to things like parental leave and part-time working. It added that they should support employees at key life events to make sure they fully understand the impact their decisions can have on their pension pots.