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A flexible retirement, where people carry on working to top up pension income, is a ‘mirage’ according to insurance giant Royal London, and will result in having to work well past age 70.
Pension provider Royal London has produced research looking into what would happen if someone who has only contributed the minimum to their pensions under government 'auto-enrolment' rules, decides to draw a state pension as soon as they can and immediately cuts down to part-time work.
As with previous Royal London reports, it defines a ‘gold standard’ retirement (income at retirement is two-thirds of pre-retirement levels) or a ‘silver standard’ retirement (income is half of pre-retirement levels).
For those who want a pension that provides a flat income with no inflation protection and no support for a widow/widower:
The report encourages workers to contribute more than the legal minimum of 8% (combined employee and employer contribution) to a workplace pension.
It said a 10% rate allows an individual to retire around three years earlier, while a contribution rate of 12% allows an individual to retire around six years earlier than if they contributed just the minimum.
The minimum contribution levels for auto-enrolment – which automatically puts workers into a company pension scheme if they are not already in one – were set while Steve Webb, now director of policy at Royal London, was pensions minister under the coalition government.
Before 5 April 2018 the total minimum contribution is 2% (including staff contribution), rising to 5% from 6 April 2018 and then 8% from 6 April 2019. After that it is expected the minimum rate will rise further but no firm plan has yet been set.
Webb 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,’ he said.
He added: ‘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 one per cent 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.’
The government will undertake a review of auto-enrolment this year which will include looking at contributions minimums. Chris Curry, director of the Pensions Policy Institute, will head up that work.
The current pensions minister Richard Harrington said last month he thought people should be aiming for pots of around £250,000 by the time they retire.
Research for Citywire's New Model Adviser® by pensions Aviva, earlier this month, indicated that an individual whose salary builds up to £27,000 over their career and saves for 40 years with no breaks would need combined employee and employer contribution levels of 25%.