Pension poverty is the bleak reality for nearly two million pensioners in the UK, scraping by on less than 60% of the UK average income.
If you’re dreaming of retirement as the chance to relax and recharge, check how far your own pension savings can stretch.
Limited State Pension
The State Pension only provides a limited safety net. For those who reached retirement age before 6 April 2016, the basic State Pension is just £6,981 a year. Even the full new basic State Pension is only £9,110 a year, a fraction of national average household income at around £26,800 a year.
Without extra income from work or private pensions, many senior citizens face harsh choices between heating and eating, unable to afford the warm clothing and energy bills to cope with winter weather. Others are forced to continue working, just to make ends meet.
Pensioners hit hardest
Poverty hits harder for women, single people, those who rent and ethnic minorities, according to research by the Joseph Rowntree Foundation. Lower pay while working, career gaps and part-time roles all restrict pension saving, and eat away at retirement income. Hundreds of thousands of women born in the 1950s suffered financial hardship when their State Pension age was pushed up further and faster than expected. Life events such as illness, redundancy, bereavement and relationship breakdown can also derail retirement plans.
Poverty isn’t only driven by low income. Higher costs, whether for rent, social care or disabled support, can leave little over.
Pressure from the pandemic
Recently, COVID-19 has ripped up many people’s retirement plans, forcing older workers to delay retirement or retire earlier than expected. Others have stopped or shrunk pension contributions, in the face of job losses or lower wages while on furlough.
Learning from my mother’s pension prospects
Personally, I was prompted to start paying into a pension by my mother’s dire warnings about her own pension. Like millions of other women, my mother doesn’t get a full State Pension. She paid ‘married women’s stamp’ while working, an option for working wives until 1977. It meant paying lower National Insurance Contributions in exchange for a lower State Pension, based on her husband’s contributions.
The whole system was arranged around the idea of male breadwinners building up pension savings which would then support their wives. Sadly, this doesn’t work so well for the divorced, widowed, separated or single. My mother also cashed in her teachers’ pension to cover expenses early in her married life, stopped working after my sister and I were born, and then became self-employed – with no employer to pay into a pension for her.
Her pension worries made me keen to save enough to actually enjoy retirement. I have done charity fundraising challenges in the past, feeding myself for £1 a day or living on the same rations as a Syrian refugee in a camp. No-one should have to live on so little, whether retired or not. Thanks to my mother’s advice, I started paying into a pension early, topped up my contributions before maternity leave, and am well on track to avoid retirement poverty.
How to avoid pension poverty
Keen to enjoy a more comfortable retirement? Follow these top tips:
Start by checking your State Pension forecast online at gov.uk. You can see what you’re entitled to now, how much you should get by retirement age and when you should get it. You can also check your National Insurance record, with the chance to top up any gaps in the last six years.
Then check forecasts for any workplace or private pensions, whether by digging out paperwork or logging into your accounts online. If you have lost track of pensions from previous employers, try the Pension Tracing Service. Once you’ve got a sense of your current retirement savings, you can plug the numbers into a pension calculator to see what kind of income you might receive.
As a rule of thumb, experts suggest aiming for two thirds of your current income. This assumes you’ll save on commuting costs and housing costs, after paying off your mortgage, in later life. If your pension savings are well on track for the kind of lifestyle you’d like, congratulations! If not, consider how to boost your pension pot.
Prioritise pension saving early
The earlier you start paying into a pension, the more time your money has to grow. The magic of compounding means that even small sums paid in during your early 20s can make a massive difference by the time you reach retirement. Equally, opting out of a workplace pension, or delaying pension payments while self-employed, can hit your pension pot hard.
If you’re part of a couple and take a career break to raise children, work out if it’s possible to budget for pensions for you both. Even non-taxpayers can stash up to £2,880 a year in a pension, and see it topped up to £3,600 with tax relief.
Review your pension planning as you approach retirement
If your pension savings are in dire straits closer to retirement, you face two choices: save more or delay retirement. The good news is that if you plough more into your pension, you can take advantage of the free money added in tax relief and any employer contributions.
If you’ve been auto-enrolled in a workplace pension scheme, the minimum contribution is set at 8% of your earnings: 4% from you, 1% tax relief and 3% from your employer. If you can afford to make additional voluntary contributions to your work pension, or pay into a separate private pension, it will boost your retirement prospects. Sacrifices now can help secure your longer term financial future.
Checking charges for your pension and its investments, and switching to lower cost alternatives, mean you will hang on to more of your hard-earned cash. You may be lucky enough to benefit from inheritance or property prices, if you sell the family home to move somewhere smaller. However, unlike regular pension contributions, you can’t rely on such windfalls to lift you out of poverty in retirement.
Earn extra during retirement
If money’s tight after retirement, check you’re claiming all the benefits you’re entitled. More than a million pensioner households are missing out on Pension Credit, according to the DWP. The average amount of Pension Credit unclaimed is £39 a week according to Age UK, which adds up to more than £2,000 a year. Around 1 in 7 of those who should be claiming Housing Benefit to help with rent are also missing out.
Pension Credit doesn’t just provide extra income – it also unlocks support with housing, health and more recently free TV licences for over 75s. Depending on your circumstances, other benefits, such as attendance allowance, carer’s allowance, disability living allowance and personal independence payments, may also be relevant. AgeUK offers a benefits calculator and a free advice line on 0800 055 6112.
Women on low State Pensions should also check if they’re due a top up based on their husband’s contributions. If you were born before 6 April 1953, are married, divorced or widowed, and get less than £80 a week in State Pension, you may be entitled to more, particularly if your husband, ex-husband or late husband had a full basic State Pension.
Faith Archer is a personal finance journalist and money blogger at Much More With Less. Check out Faith and Lynn’s videos about spending during lockdown and after lockdown.