As many as SEVEN MILLION workers face a bleak retirement because they are not saving enough for retirement, a think tank says, with ‘default’ contributions set to be higher for middle-income earners and companies expected to pay even if employees do not

As many as seven million workers face a bleak retirement because they do not save enough for retirement.

A report by respected think tank IFS has exposed the potential time bomb of poverty facing the current generation of workers.

The study found that between 30 and 40 per cent of private sector workers saving in defined contribution (DC) pensions will not reach standard benchmarks for a comfortable income.

One in five people do not put any money aside, while less than half put aside more than 8 per cent of their earnings.

The review, carried out in partnership with the abrdn Financial Fairness Trust, found there was a “strong case” for employers to contribute 3% of total pay to an occupational pension scheme, even if employees do not.

It has also been suggested that workers earning above-average wages should have a higher “default” contribution rate of 7 per cent.

This could benefit the 22% of private sector workers who opted out of a pension scheme or were not automatically enrolled in one because their earnings were too low.

IFS said that while there was a risk that more employees would opt out of contributing, a trial approach could be carried out before implementation.

The IFS said the age bracket for automatic enrolment should be widened from 22 (state pension age) to 16-74 to allow even more people in work to save for later life.

The report also suggests that increased default contributions should be targeted at middle and upper earners to help some middle and upper earners better supplement their state pension.

For example, the default rate of overall contribution might be 12 per cent for earnings above £35,000 – which is roughly the level of the median full-time earner.

Laurence O’Brien, research economist at the IFS and author of the report, said: “Too many private sector workers appear to be on track to achieve low – or disappointing – retirement incomes.

“While there are often concerns that savers are not saving enough, an additional concern is that despite automatic enrolment increasing the number of people taking part in a workplace pension scheme, more than one in five private sector workers still do not have money saved for retirement.”

David Sturrock, senior research economist at the IFS and co-author of the report, said: “There is a strong case for almost all employees to collect pension contributions from their employer, whether or not they pay them themselves.”

Mubin Haq, chief executive of the abrdn Financial Fairness Trust, said: “Guaranteeing 3 per cent from employers regardless of whether an employee contributes could increase employer pension contributions by £4 billion a year. It would be particularly beneficial for women, part-time workers, young adults and the low-paid.”

Tim Gosling, head of policy at People’s Partnership, the People’s Pension provider, said: “The IFS’s focus on alleviating concerns about the affordability of increased retirement savings for those on lower incomes is very welcome. Workplace pension policies need to work across the entire earnings distribution.”

A Department for Work and Pensions (DWP) spokesman said: “We will ensure future retirees have the dignity and security they deserve in retirement by delivering our groundbreaking pensions review, which aims to boost investment, increase retirement savings and tackle waste in the pension system.

“More than 15 million savers could benefit from our new pension scheme law – which could give the average earner £11,000 more in their defined contribution savings by the time they retire.”