Pension crisis: Britons warned shortfall for moderate retirement grows to £31,000

The data shows a worrying drop in retirement savings, with only 38 per cent of households meeting their goals six months ago, down from earlier figures.

Financial security in later life has worsened for all income levels since the pandemic, with middle - and low-income households facing the biggest challenges.

The gap in pension savings has grown four times larger since 2019, mainly due to rising inflation and the ongoing cost-of-living crisis that is putting pressure on household budgets.

There are also significant differences in how well-prepared different regions of the UK are for retirement.

London boroughs dominate the list of areas with the largest pension gaps. Brent, Enfield, Barking & Dagenham, and Newham - share the highest pension gap of £75,203.

In sharp contrast, Wokingham in the South East emerges as the most financially resilient area, with households facing an average pension gap of just £265.

The difference between regions is especially noticeable, with eight areas in London ranking among the ten worst in the country.

Kingston upon Hull, identified as the least financially resilient authority overall, shows households falling £54,641 short of what they need for a moderate retirement.

The South East region demonstrates particular strength, with Hart (£425 gap) and Elmbridge (£4,210 gap) joining Wokingham among the best-performing areas.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: "Retirement resilience has dropped from 38 per cent just six months ago to 36 per cent with middle to low-income households hardest hit.

"This is due to rising inflation boosting the amount of money needed for a moderate retirement with the pension gap opening up to £31,546 four times more than it was in 2019."

She added: "The cost-of-living crisis has had a bruising impact on our finances which many households are still grappling with."

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The regional variations are particularly striking, according to Morrissey, who noted: "Wokingham for instance is well on track on average households have a pension gap of just £265. Compare this to Kingston on Hull where the gap to a moderate retirement income stands at a massive £54,094."

The Government's ongoing Pensions Review is examining several potential solutions to address the widening pension gap.

Morrisey explained key goals include reducing lost pensions and small pension pots, which will help people track their savings.

The Lifetime Pension is suggested as a way to boost engagement and competition by allowing people to choose their pension provider throughout their careers.

This would help prevent pensions from being lost when changing jobs and make it easier to manage savings, as one larger pot is easier to track than several smaller ones.

There’s also the option to raise auto-enrolment contributions above the current eight per cent, but she warned this should be carefully considered to avoid financial strain on individuals.

An alternative is to offer higher employer contributions for employees who increase their own, which would encourage those who can afford it without forcing others to contribute beyond their means.

The self-employed, who often have less retirement savings, are another focus of the review.

Morrisey explained that the Lifetime ISA could be an important tool for them, as it offers flexibility with access to funds in emergencies, though with a penalty.

A proposed reduction in the exit penalty from 25 per cent to 20 per cent, along with allowing older workers to open a LISA, could make this a more useful option for the self-employed.