Wednesday briefing: Why millions of Britons face a pension cliff edge
In today’s newsletter: A new report warns that many in the UK are under-saving for later life, leaving some with little choice but to work longer
Good morning. I am going to whisper this gently so you don’t get spooked back under the duvet – there is a good chance that you are one of at least 15 million Britons not saving adequately for retirement. That is according to a report published this week by the Pensions Commission.
The pensions “cliff edge” is no longer a distant warning; for many, it is becoming a reality. As the cost of living continues to bite, the dream of a comfortable retirement is being replaced by a pragmatic – and often scary – calculation of how long one might have to stay in the workforce. And many of us, it seems, are getting our numbers wrong.
For today’s newsletter, I spoke to business and financial journalist Elizabeth Anderson, and Paul Lewis, who presents Money Box on BBC Radio 4. I asked them how we as a nation have got ourselves into this situation, and how we should properly prepare for retirement. First, the headlines.
Five big stories
UK news | British homes will need air conditioning to survive predicted levels of global heating, the government’s climate advisers have warned in a report, as measures such as drawing curtains, opening windows and growing trees for shade are not likely to be enough.
UK politics | Andy Burnham will face Reform UK’s Robert Kenyon in next month’s crucial Makerfield byelection in a clash that could change the course of British politics for years to come.
World news | Xi Jinping welcomed Russian president Vladimir Putin with pomp and pageantry as the pair kicked off talks in the Great Hall of the People, days after the Chinese leader hosted Donald Trump in the same location.
US news | The US vice-president, JD Vance, has urged anti-immigration activists in the UK to “keep on going” after tens of thousands gathered for a rally in London.
Cost of living | UK supermarkets have been asked by the government to consider freezing the prices of some essential foodstuffs to protect the public from inflation fuelled by the Middle East conflict.
In depth: ‘Doing nothing isn’t an option’
As our senior economics correspondent Richard Partington reported yesterday, 15 million Britons are not adequately saving for retirement. Without action this figure could quickly rise to 19 million, according to the Pensions Commission.
The crisis is particularly acute among low- to middle-earners and the self-employed, with only 4% of the latter group putting money into a pension at all. Auto-enrolment, introduced by the last Labour government and implemented by the coalition and Conservative administrations, has brought millions of employed workers into the pension system, but about half of those employees are putting only the minimum required amounts into their retirement funds – currently 8% of total earnings, split between employee and employer contributions.
The report also exposed a staggering gender gap, with women approaching retirement holding just half the private pension wealth of men. To address these systemic failings, the commission is calling for a “renewed national settlement”.
Elizabeth Anderson, who has been writing about pensions and finance for more than a decade, tells me that sometimes she wonders if it is just the word “pension” that puts people off. “Having spoken to a lot of people about this over many years, a lot of people still don’t really understand how pensions work,” she says. “People think it’s something complicated and inaccessible, whereas effectively it’s just a savings pot.”
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Why has this happened and is the problem getting worse?
In recent years, there has been a shift away from “defined benefit” schemes – the gold-standard final salary pensions of previous generations, where you were guaranteed a set income for life after retirement – to “defined contribution” schemes. This has caused major problems for retirement planning. In most modern schemes, you can only get out of your pension pot what has been put in, along with any interest that has accrued.
As wages have stagnated and housing costs have swallowed a larger share of take-home pay, the “surplus” cash required to top up a private pension has simply evaporated for many households. With the state pension currently topping out at £241.30 a week, private pensions are vital.
“That’s the tragedy of auto-enrolment,” Paul Lewis concludes. Minimum contribution levels are set at levels to make the schemes affordable for employers. “It’s a great idea, and it’s much better than having nothing, but it’s simply not enough. These funds will be enough to keep you off means-tested benefits, which is good news for future governments, but they won’t be enough to live on in any decent way.”
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Why are we neglecting our pension pots?
“There is a rule of thumb,” Lewis says, “that you should save a percentage of your income equal to half the age you were when you started saving. If you start at 20, 10% of your income a year until you’re 70 might be OK. If you start at 50, you’d need to save 25% a year. Personally, I think those figures actually underestimate what is required.”
Anderson raises the cost of living in our conversation. She notes that if people are paying into a pension, they are locking that money away until they are at least 55. “For a lot of people, they need as much money as they can get right now.”
Lewis concurs. “It’s very easy for me to say ‘put more in’, but if you’re saving for a mortgage, buying food for children, or commuting, there’s often nothing left. That is the worry. The arithmetically ‘good’ advice is almost impossible for many people to follow.” According to the Resolution Foundation, the poorest working-age families have seen their incomes fall by £1,800 per year since 2021-22.
Still, Anderson tells me she is particularly surprised at the low number of self-employed people contributing to a pension scheme. “For the self-employed, saving into one is much more tax-efficient because you get tax relief. To put it simply: if you put £10,000 of your earnings into a pension, the whole lot goes in (subject to allowances). If you took that as income, you’d be paying tax and national insurance; if you’re a higher-rate taxpayer, you could lose almost 50% of it. It’s just a way of saving tax-efficiently for the future.”
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What should you be doing?
Lewis offers the slightly impractical advice of going back in time and starting to save earlier, which, it must be said, isn’t particularly comforting. Especially at my age when I’d need to go back to the last century to adjust spending habits sufficiently to counteract the amount of money I foolishly frittered away in my youth.
There is a wealth of advice out there. Sandra Haurant wrote for us that people shouldn’t panic during turbulent times, and should prioritise sticking with paying into their pension. She advises that you should resist opting out of your work’s pension scheme, and instead consider contributing extra where you can. In many schemes, greater personal contributions trigger an increase in those from your employer. For the self-employed, a stakeholder pension – a retirement plan with capped annual charges and a minimum monthly contribution of £20 – is well worth considering.
The government-backed MoneyHelper website has a section dedicated to advising people on pensions, with the chance to make appointments to speak to an expert, a calculator to help you work out what you can afford to pay and what you can expect to receive, and clear explanations of what types of pension there are.
And, if you want to give your finances an entire overhaul, at the turn of the year our money and consumer editor Hilary Osborne, among others, put together this list of 26 apps and tools to help with your money planning.
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What should the government be doing?
In publishing its interim report, pensions commissioner Jeannie Drake said: “The recommendations we present in our final report will address the need to secure adequate income in later life and a pension system that is fit for decades to come.”
Lewis suggests that real reform will be a tough sell to UK businesses. “It is almost impossible to contemplate making employers pay more right now because they have so many extra costs and businesses are struggling. I don’t see that happening politically in the near future.”
The report offers an interim conclusion to government, suggesting ministers face a brutal three-way choice: hike taxes to fund a growing elderly population, force both individuals and employers to cough up significantly higher contributions, or further hike the retirement age (for Britain’s younger workers, the state pension age is due to rise to 68). It is an unenviable “pick-your-poison” scenario for any politician, but with four in 10 people currently under-saving, “doing nothing” isn’t an option.
For now, it’s on us. “The first easy step for most people,” Anderson says, “is just to find out exactly how much you have.”
“If people check, they might have a pleasant surprise, especially if they’ve been paying in for a long time and compound interest has helped it grow. The earlier you start, the more time it has to compound.”
What else we’ve enjoyed
In her dispatch from Suifenhe in north-east China, which borders Russia, Amy Hawkins explores how trade and tourism are rapidly evolving in this border town, and what it tells us about the changing relationship between Beijing and Moscow. Michael Segalov, newsletters team
My parents sometimes said: “Who’s that, Whistler’s mother?”, which was baffling as a child. The painting that inspired the phrase is on loan in London as part of a James McNeill Whistler retrospective, reviewed by Jonathan Jones. Martin
Post-pandemic, millions more of us have dogs, and we are bringing them everywhere. Not everyone, however, is thrilled at the proliferation of pets in our public spaces, myself included. I enjoyed Emine Saner’s reporting on Britain’s plague of pooches. Michael
The story of a student forced to drop a class, pick up a job and navigate a complicated financial aid system after her father was detained by ICE during her second semester at Cornell. Martin
Stretching across the African continent, the Sahel region south of the Sahara has seen approximately half of all global deaths from terrorism for three years running. In 2007, that figure was under 1%. This meticulously researched interactive story examines the data and the specific challenges facing Nigeria. Michael
Sport
Football | Arsenal are Premier League champions for the first time since Arsène Wenger’s Invincibles in 2004, after Manchester City drew 1-1 at Bournemouth.
Football | Southampton could face a legal claim from their players for loss of earnings after the club were expelled from the Championship playoff final for spying on training sessions staged by Middlesbrough and two other second-tier rivals.
Tennis | Carlos Alcaraz has been forced to withdraw from Wimbledon as he continues his recovery from the wrist injury that will force him out of action for at least three months during the most significant part of the tennis season.
The front pages
“UK must get used to being a hot country, climate advisers warn”, is the story leading the Guardian today.
The Times says “Milk, egg and bread prices could be frozen”, the Telegraph’s take is “Reeves tells shops to cap food prices”, and the FT writes “Treasury asks supermarkets to cap prices on staple foods”.
The i Paper runs with “Cabinet ministers woo Burnham in race for top jobs”, while the Mail says “Burnham said that men who identify as women should be able to use female toilets”. The Express says “Energy bills to soar by £200 in ‘another failed promise’”.
The Sun splashes on “Married at First Sight axed” and on the same story Metro says “In hindsight, no wonder it went wrong”. The Mirror’s lead story is “Kylie: my secret cancer battle”.
Today in Focus
Did Trump really rescue Venezuela?
The Guardian’s Latin America correspondent, Tom Phillips, on life in the country four months after the US abduction of the former president Nicolás Maduro.
Cartoon of the day | Ella Baron
The Upside
A bit of good news to remind you that the world’s not all bad
The Chelsea flower show began yesterday with a curious addition to the more typical displays of flora that visitors have become accustomed to each year. Filled with the scent of jasmine and the pleasant textures of dill and thyme, the Sightsavers sensory garden aims to be “an accessible, inclusive space” that encourages people to feel, taste and touch the plants – or even hear them, courtesy of a soundscape devised from their bioelectric signals.
Janice Molyneux, one of the designers, said: “If you were to shut your eyes, you could feel and smell your way around the garden.” At its centre is a steel halo structure that collects rainwater, creating a “relaxing, natural sound” as it does so. The garden’s ethos is modelled on the charitable work that Sightsavers does across more than 30 countries, supporting people experiencing sensory loss.
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Bored at work?
And finally, the Guardian’s puzzles are here to keep you entertained throughout the day. Until tomorrow.