Inflation and wage stagnation restricting pension pots

Rising prices and the slow rate of wage growth could mean pension pots will be worth £15,000 less in real terms.

Everyone wants to enjoy a comfortable retirement. Unfortunately, a new report suggests that the current economic situation means that many savers face retiring with a far smaller pension pot.

One of the biggest issues facing pension savers is wage stagnation. Because our wages are growing so slowly, it means that people are less able to put money aside for their retirements.

The Scottish Widows report noted that it took a long time for wages in this country to recover from the financial crisis, 14 years for incomes to recover to their 2008 peak.

It calculated that if salaries had instead continued rising at the same rate as before the crisis, the median worker’s salary today would be 28% higher, which works out at around £7,700 more. 

Cumulatively, that works out at a ‘lost’ income of a whopping £78,800.

That fall in income has an enormous impact on our ability to save for retirement too.

A median worker who was first auto-enrolled back in 2012 would have saved £15,700 into their pot today. Yet if salaries had continued to grow at the same previous rate, then £21,300 would have been saved, more than £5,500 more.

This loss becomes more pronounced over time, as well.

Yes, that £15,000 that you’ve invested will grow as your investments deliver a return.

But that return would be even bigger had you been able to save £21,000 plus.

Those bigger returns would then allow you to invest further, meaning that in the long run, your pot would be much more significant by the time you gave up work.

Increasing costs

The situation is compounded by the inflation situation.

We are currently experiencing inflation at levels that simply have not been seen in decades, with the cost of everything we want to buy rocketing.

The sharp rise in inflation means that even though wage growth has picked up, it’s been completely wiped out by the higher costs we have to pay.

The obvious impact of these rising prices is that our money is being put under greater pressure.

Households up and down the country are having to make do with less, having to find ways to stretch their money to cover the essentials every month, never mind the added luxuries that make life worth living.

And that also impacts our ability to save for retirement. An awful lot of people want to set aside more cash for their retirement, they are simply unable to because of their other outgoings.

What’s more, this situation looks likely to get worse, at least in the short term, with further increases likely.

For example, the current forecasts are for the energy price cap to pass £3,000 at the turn of the year.

According to Scottish Widows, these twin issues mean that the average earner in their 30s who joined a workplace pension when they were launched will have contributed £7,000 less by 2024.

And by the time they retire, that will mean having to deal with a pension pot worth £15,000 less.

That’s an enormous drop, enough to make your later years far more of a financially worrying time.

There’s no easy answer

The Scottish Widows report notes that by comparison to our European cousins, the amount that we pay into our pensions is “chronically low”. 

While the workplace pension scheme has been phenomenally successful at getting greater numbers to engage with pension saving, and actually start putting some cash aside, the reality is that the amounts being saved are unlikely to be enough.

This isn’t a question of ignorance, either. Many savers know full well that they aren’t saving enough for the retirement they want, even with the boost they get from employer contributions and tax relief.

Indeed, half of those surveyed by Scottish Widows said they don’t feel they are preparing adequately for retirement.

However, there’s a big difference between recognising the problem and being able to do anything about it.

Some want to see the minimum contributions for workplace pensions ratcheted up, perhaps to 15%, which logically makes sense.

If people put more aside, then they will end up with a better-sized pension pot when they eventually give up work.

Yet there is a danger that pushing up those contributions at a time when finances are already stretched will simply mean people stop contributing altogether, which will cause far greater problems down the line.

There isn’t an easy answer here.

As pension savers, we need to try to take a long-term view, recognising how important it is to save an adequate amount. After all, you never meet a pensioner who wishes they saved less during their working years.

Yet that is always going to have to be balanced against short-term pressures.

And the sad fact is that most people are going to face increased spending pressures in the months ahead.