Savers hoping for flexible retirement face working into late 70s, expert warns
Millions of pension savers hoping to gradually phase in their retirement could find themselves working into their late 70s or beyond to achieve the lifestyle enjoyed by previous generations, a report warns.
Sir Steve Webb, a former pensions minister, warned that the dream of a flexible retirement where people gradually go part-time before giving up work entirely when it suits them could turn out to be a "mirage" - if people only contribute minimum amounts into their workplace pension pot.
Sir Steve, who is now director of policy at Royal London, said an average worker wanting a "gold standard" of retirement - where their pension income equates to two-thirds of pre-retirement levels - may have to work until they are 79 before they can afford to fully retire if they are aiming to reduce their working hours gradually.
Someone targeting a more modest "silver standard" of retirement - where their income is around half pre-retirement levels - could have to work until they are 69, Royal London calculated.
The scenarios are based on someone only saving into their pension at the legal minimum level, deciding to draw a state pension as soon as they can and immediately cutting down to part-time work by halving their previous hours.
Royal London said those who also want to have protection against inflation when they eventually take their retirement income and some support for a widow or widower could still be working in their 80s before they achieve their desired income.
Sir Steve said: "A flexible retirement, where we can gradually reduce our hours and stop work at an acceptable age, is likely to be a mirage for millions of people based on current levels of saving.
"Those who opt for a gradual retirement, drawing a state pension as soon as they can and cutting their working hours could easily find themselves unable to afford to retire fully until they are in their late 70s or beyond, unless they have built up a significant private pension pot."
Royal London said nearly four million workers, many aged in their 20s and 30s, are only saving at the minimum rates, and "cannot hope to ease their way gently into retirement in later life".
The minimum contributions into workplace pensions are gradually being increased, from 2% of qualifying earnings, including contributions from workers and employers, to 8% by April 2019.
But concerns have been raised that some people may assume that if they only save the minimum amount they will still achieve the comfortable retirement they desire.
The report said: "If we do not want to see a generation of workers who simply cannot afford to retire with a decent living standard at acceptable ages, the issue of boosting contribution rates beyond the minimum 8% level must be addressed as a matter of urgency."
The report also found that generally, increasing workplace pension contributions by an extra percentage point could potentially cut the length of time someone needs to work by at least one year, even for those who have not started saving into a pension until their 30s.
Sir Steve said: "The good news is that there is an antidote to excessive working lives and this is higher rates of pension contributions. We find that each 1% on pension contribution rates takes at least one year off the number of years for which you have to work to achieve a decent retirement."
In December, the Government announced a review of automatic enrolment into workplace pensions, which will explore ways in which the policy can further encourage workplace pension saving.
Eventually, around 10 million people are expected to be newly saving into a pension or saving more as a result of the initiative.
A Department for Work and Pensions (DWP) spokesman said: " More than seven million people are now saving into a workplace pension through automatic enrolment, creating a culture of putting money aside for retirement.
"We know that people need to save more which is why contributions will be increasing over the coming years and we are reviewing the policy to see how it can go further."