Middle- and higher-income groups aged between 50 and state pension age are amongst the worst financially prepared for old age, a government analysis has found.
A Department for Work and Pensions report, Scenario analysis of future pension incomes, sets out the scale of the savings challenge facing the UK, as the average age of the country's population rises. Its analysis used a replacement rate - a percentage of income between age 50 and state pension age - and target rates to reveal the number of people classed as undersaving.
It found around 11.9 million people below the statutory retirement age are not saving enough to provide an adequate pension income. Of these people, almost half of them are at least 80% of the way towards achieving their target income, while only 8% are less than 50% of the way there.
The report warned that, while the problems existed amongst all income groups, it was people in the middle and higher income ranges who will face the biggest income hit when they give up work.
Typically, people in the middle income groups - those earning £22,700 to £32,500 - did not contribute to private pensions while in work. And people in the higher income groups - those earning £32,500 to £52,000 - failed to contribute enough to private pensions to generate large enough retirement earnings.
With auto-enrolment in place, the report highlighted that 92% of undersavers are on the right track to securing an adequate income in retirement. It noted that some only needed to save a few extra pounds per week in retirement to achieve adequacy.
The report suggested that additional years contributing to defined contribution schemes provide higher pension incomes, particularly for medium to high earners. Those in the middle-income groups could see huge improvements to their pension adequacy by increasing contribution rates, the report suggested.
For those at the very top of the earnings distribution before retirement, private pensions saving at a rate higher than 15% would be needed to achieve an adequate retirement income. But the report recognised that this could prove punitive for lower earners and encourage more people to opt out of workplace pensions entirely.
The report acknowledged that increasing the level of contributions to private pension schemes would have an impact on the net take-home pay of individuals while working.
On this basis, DWP believes that further work is needed to consider pension contribution rates which strike the right balance between providing improved retirement outcomes for all but do not have a detrimental impact on working-life incomes.
Pensions minister Steve Webb said the government's recent pension reforms would make a huge difference to the long-term financial prospects of most working people.
'But while the state will always provide a decent safely net so people can get by, anyone wanting to see their standard of living maintained into old age needs to make their own provision too,' he said.
'This new research shows that by saving just a little more, a huge number of people could make their future so much more comfortable.'
Commenting on the analysis, actuaries Barnett Waddingham reaffirmed that contribution levels of 8% were 'inadequate' and would 'not deliver the sort of returns needed for a comfortable retirement for most people'.
Malcom McLean, a senior consultant at the firm, said: 'Time is pressing and the DWP needs to expedite any further research it wishes to conduct in this respect.
'In the circumstances, an early increase to say 11% (6% employee, 4% employer, 1% tax relief) of attributable earnings might be more appropriate and would help to secure better outcomes for millions more in the future.'
