By Claire West
Middle income households in the UK face a severe squeeze on their income in retirement and a significant reduction in their quality of life, according to a new report.
Around 15 million UK households in the middle inco me group risk a reduction in their income of almost 60% from their pre-retirement income.
Around 10 million households - the poorest 40% - risk having to live mostly off state pension provision that only just ensures a minimum standard of living.
The scale of the reductions in income and the potential for dashed expectations about individuals' quality of life in retirement raise the spectre of future political and fiscal pressures.
Squeezed in Retirement: The Future of Middle Britain, projects retirement incomes forward to 2050, by age and income group, and assesses their vulnerability to potential adverse conditions. The research is particularly relevant for policy makers because the problem of the retirement-income squeeze for middle Britain is evident even after all legislated changes to the UK pensions system have been taken into account.
The report suggests that there is a window of opportunity to support the middle-aged, middle-income groups either to adjust to lower retirement incomes or to save and avoid seriously diminished living standards in retirement.
In the best case economic scenario, if the middle can make additional savings of around 10% of their income from the age of 45, they could boost wealth upon retirement by as much as 25%, in real terms. This would offset the projected decline in retirement living standards to 2050.
While the 2010 Pensions Bill rightly includes provisions to increase the state pension age to 66 and encourage greater savings through auto-enrolment, the squeezed middle are not receiving enough attention.
Paola Subacchi, one of the authors of the report, says:
'The UK is relatively unique in the degree of experimentation in its pensions system. Because of its reforms, the UK should not expect a pensions crisis such as that faced by Germany or France, in which the state is committed to generous pensions for an ageing population. However, the UK has a distinct problem with middle inc ome earners who are failing to save enough and are likely to find the drop in income during retirement unexpected and unacceptable.'
The current savings deficit clearly indicates a failure of existing tax incentives for pensions and more radical measures should be considered.
The report recommends that the UK government should look at guaranteeing minimum annuity rates, providing matching schemes for pension contributions and improving access to financial advice.