"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."
The mutual insurer says nearly four million workers, many in their 20s and 30s, are only saving at the minimum rates set by the government and "cannot hope to ease their way gently into retirement in later life".
It added that the frequently discussed idea of a ‘flexible’ or gradual retirement may therefore be a ‘mirage’ for millions of people saving at current levels.
The research found that a worker targeting a ‘gold standard’ retirement (where income at retirement is two-thirds of pre-retirement levels) who retires gradually will have to work until they are 79 before they can afford to retire. This compares with retirement at 74 for a worker who defers taking a state pension and maintains full-time hours until they stop working.
A worker targeting a more modest ‘silver standard’ retirement (where income at retirement is half of pre-retirement levels) but who retires gradually would have to work on until they were 69, compared with retirement at 68 for a worker who defers their state pension and continues in full-time work.
Those targeting a pension which provides protection against inflation and something for a widow or widower could still be working into their 80s before they have enough money to afford to retire.
However a higher contribution rate of 10% allows an individual to retire around three years earlier, whilst a contribution rate of 12% allows an individual to retire around six years earlier.
As a rule of thumb, even for workers who do not start saving into a pension until they are in their thirties, each extra 1% on the pension contribution rate reduces the number of years that they have to work by at least one year.
With average earnings assumed at £27,600 per year, an additional 1% of qualifying earnings would be just over £4 per week, including any contribution from the employer, the employee and tax relief.
Steve Webb, Director of Policy at Royal London, 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 seventies or beyond unless they have built up a significant private pension pot.
“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. For those who want to have choices in later life about when and how they retire, doing more now to build up a decent pension pot is becoming essential. These findings need to be considered carefully by the Government as it reviews the rules around automatic enrolment in 2017.”
