High earners in the UK have the biggest pension problem – and most of them don’t know it yet
A major new study from the Institute for Fiscal Studies (IFS) has delivered a stark warning for Britain’s higher-paid workers. Despite earning well above average, many are quietly heading toward retirement shortfalls that could force painful lifestyle cuts.
The research, published in the Journal of the Economics of Ageing, analyses the UK’s shift from generous defined-benefit (DB) pensions to defined-contribution (DC) schemes. It finds that while automatic enrolment has dramatically boosted workplace pension participation, the system is failing high earners in particular.
Nearly 58% of the highest-earning quartile of private-sector workers currently saving in DC pensions are projected to miss the retirement income targets set by the influential Pensions Commission two decades ago. That’s compared to just 12% in the lowest earnings quartile. Overall, 40% of all DC savers are on track to fall short.
The numbers come from sophisticated modelling of the Wealth and Assets Survey, tracking 25- to 59-year-old private-sector employees.
Researchers assumed workers stick with their current contribution rates, simulated career progression, gaps in employment and health-related early retirement, then projected retirement income from private pensions (converted to an annuity) plus the full new state pension.
They compared this to “target replacement rates” – the pre-tax income needed in retirement relative to late-career earnings. These benchmarks, developed by the Pensions Commission, are 80% for low earners, 67% for middle earners and just 50% for those earning above roughly £90,000.
Why are high earners most at risk?
The state pension is flat-rate – currently around £12,000 a year, or about 30% of median full-time earnings – and doesn’t scale with salary.
Higher earners therefore rely far more heavily on their private DC pots, yet the default automatic enrolment contribution rate of 8% of “qualifying earnings”translates to a smaller share of total pay as salaries climb.
Many middle- and high-earning professionals simply aren’t saving enough privately to bridge the gap.
“High earners may feel secure because of their current salaries, but the modelling shows the system isn’t delivering adequate replacement rates for them under current defaults,” said Jonathan Cribb, the lead author and an IFS economist. “The flat state pension helps lower earners disproportionately, leaving higher earners more exposed.”
This issue is further compounded by the fact that 23% of private-sector employees aren’t saving in a workplace pension at all, while 80% of self-employed workers have no private pension saving. Among those who are saving, contribution rates remain low for many.
Not listening to guidance
The third big challenge highlighted in the paper is what happens when people actually reach retirement.
Since the 2015 “pension freedoms” reforms scrapped compulsory annuitisation, savers can access their pots flexibly from age 55, but most don’t take advice.
In 2023-24, 70% of people accessing DC pots (and 30% of those with pots over £250,000) used no financial advice or even free guidance. Just 9% bought an annuity.
That leaves many exposed to longevity risk, market volatility and the temptation to spend too fast or too slow.
