Millions may face working into their late 70s

Sir Steve Webb, a former Pensions Minister, warned 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, the director of policy at Royal London, said an average worker wanting a “gold standard” of retirement – where their 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 a safeguard against inflation and ensure 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 4m 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”.

Minimum contributions into workplace pensions are gradually being increased, from two per cent of qualifying earnings, including contributions from workers and employers, to eight per cent by April 2019.

Sir Steve said: “The good news is 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.”

In December, the Government announced it will look at ways to encourage workplace pension saving. The Department for Work and Pensions maintained more than 7m people are now saving into a workplace pension through automatic enrolment.

A spokesman said: “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.”