Retirement planning can be daunting – especially in the UK, where a weakened welfare state has led to one of the lowest pension provisions among OECD countries. Rising living costs, job insecurity, and financial instability due to geopolitical events have made saving for retirement even more difficult. A growing number of pension savers and pensioners are struggling to establish financial security for later life, reducing or stopping their contributions to workplace pensions and many realizing their retirement savings are inadequate. And yet, policies continue to focus on nudging individuals to conduct private pension investments, such as automatic enrolment in workplace pensions and financial education campaigns.

Deviating from the “Ideal” Work Trajectory

Interviews with UK individuals, as discussed in my recently published book, show that it is not about lacking the desire to plan for the future. Instead, people with interrupted or varied work trajectories face a pension system that does not meet their needs.

UK’s pension system is built on assumptions of full-time, well-paid employment, ignoring the realities of those engaged in caring work, self-employment, and/or in lower-income jobs. The state pension is designed to solely alleviate poverty (currently £230.25 per week), while workplace pensions (subject to earnings and age criteria) and personal pension investments are intended to provide a comfortable retirement income. To invest sufficiently for retirement, one needs the ability to contribute consistently to private pension provisions, which becomes more challenging for those whose work trajectory deviate from assumptions of full-time employment.

Besides lacking access to workplace pensions – thus missing out on employers’ contributions because of not meeting the earnings threshold –  interviews  have shown that pensions are not perceived as a desirable savings tool for those deviating from the ‘ideal’ work trajectory. In particular, the long-term nature of pensions is a concern, as it conflicts with the uncertainty associated with such work. The inability to access funds and adjust monthly contributions does not align with the working life they experience which is often determined by fluctuating incomes and changes in employment.

Retirement Planning Amid Constraints

Instead of being less inclined to plan for retirement, as often assumed by policy solutions and behavioural as well as financial literacy research, interviewees facing these constraints actively seek alternative savings methods that better align with their work trajectory. They use accessible savings products like Individual Savings Accounts (cash ISAs), contribute to private pensions where they can adjust contributions, and/or invest in property to offset expected low pension income. Cash ISAs, in particular, are seen as a viable savings tool for the future due to its tax-free allowance for interest income, their guarantee not to lose value, and the possibility of accessing funds if needed.

Even when experiencing several constraints  – such as employment gaps, lower earnings, migration to the UK, or lack of child support due to the ex-partner preventing a divorce – interviewees are turning to budgeting advice, online courses to improve their money management, and setting up ISAs in their children’s names to force themselves to save despite their financial constraints.

Relying on accessible savings products may seem counterproductive from a conventional financial planning perspective, but it reflects a rational response to uncertain income and the pressing need for financial security. This is recognized by think-tanks discussing pension policies. Because of the risk of ‘oversaving by low earners’, meaning saving for pensions leads to insufficient funds for day-to-day spending, the discussion has shifted from removing to reducing the earnings threshold in workplace pensions and providing more short-term and long-term savings options.

In this context, it seems striking that the chancellor, supported by the financial sector,  has recently contemplated reducing the allowance for cash ISAs while incentivizing stocks and shares ISAs, specifically investments in UK companies. These suggested changes are, however, less striking given that stocks and shares ISAs have largely benefitted wealthier households and provided profit opportunities for financial institutions. While this change has been averted for now, an overhaul of ISAs has been suggested. Making the most viable and tax-efficient savings method less available without making pensions more accessible would put those deviating from full-time employment in an even more disadvantaged position.

Bridging the Gap in Pension Savings

Given that individuals facing constraints actively seek to prepare for retirement, it is time to move beyond individual solutions and rethink the pension system, which remains unequal and exclusionary. Besides representing logical responses to the constraints experienced, alternative strategies do not tackle the pension system’s inherent inequalities. They lack employer contributions and result in lower returns. In the case of shared homeownership, they also carry higher risk such as ongoing service charges, rent, and being more difficult to sell. The question within policy circles thus should not be how to align financial behaviour with the current pension system’s assumptions – but how the system can adapt to support everyone.

In the short-term, reducing the earnings threshold for workplace pensions and allowing people to pause or reduce pension contributions without opting out would help. In the medium-term, equitable starting points should be created, such as maintaining employer contributions during periods of reduced employee contributions, subsidizing carer’s pension contributions, and offering government-supported financial products like subsidized Individual Savings Accounts specifically for people who work part-time, across multiple employments, or are self-employed. These measures are, however, not enough in the long-term. While recent discussions recognize the limitations of removing the earnings trigger, the overall pension system is not questioned. There is no solution offered for how people on lower and/or unstable incomes can prepare for retirement.

Developing a pension system that recognizes varied life trajectories and eliminates hidden biases would better support individuals who do not follow typical career paths. Although it is often argued that such reforms would be too costly, investment in a fairer pension system would ultimately reduce pension poverty and welfare support during retirement and stimulate economic growth.

 

Ariane Agunsoye is a Senior Lecturer in Economics at the Institute of Management Studies at Goldsmiths, University of London and an Associate Member of the Centre for Personal Financial Wellbeing at Aston University. Prior to joining Goldsmiths, she was a visiting lecturer in Germany and spent several years working in the private sector. Her current research interests lie at the intersection of political economy and personal finance, focusing on how individuals from diverse social and demographic groups respond to disadvantages embedded in current pension systems. Her most recent book Rethinking Financial Behaviour challenges the “financially irresponsible” label, showing how deviations to “rational behaviour” are logical responses to a dysfunctional system.