More than 12 million people are at risk of poverty in retirement if the Government fails to make changes, a new report from Scottish Widows has warned.
The pension provider’s latest Retirement Report found a third (31%) of people, the equivalent of 12.2 million people, face pension poverty. However, the figure is an improvement from 39% (15.3 million) in 2025.
The reduction in people facing poverty has been driven by two key factors. The first is those not saving through a pension have increased their level of savings elsewhere and most of those also now expect to own their own home when they retire. The second is falling energy costs in the short term, which have led to more people meeting the minimum lifestyle standard.
However, Scottish Widows said the current state of the nation’s savings is still “precarious” and warned that shifts in factors such as energy prices and the cost of living could have a negative impact.
Pete Glancy, head of pension policy at Scottish Widows, said: “This report paints a complex picture. While the fall in pension poverty compared to a year ago is a step in the right direction, this shift in retirement fortunes is complex and the current state of the nation’s savings is still polarised.
“The factors we can control, like how much we save or how much we expect to receive in retirement, may improve, but can easily be thrown off course by shifting external factors like increases to energy and general cost of living.”
Scottish Widows said the Government’s recently established Pensions Commissions is expected to recommend changes to put the nation in “good shape for retirement” through the second half of the century. However, it cautioned that it will be many decades until the full benefits are felt.
In the meantime, most of the population won’t have enough in their pension pots to facilitate their retirement and it will be necessary for them to consider other savings, investments and housing equity, the firm warned.
Recommendations to improve retirement saving prospects
Scottish Widows has called upon the Government to increase the statutory level of saving through auto-enrolment from 8% to 12%.
It calculates that raising contribution rates on the first £30,000 of salary would increase projected retirement savings by £40,000 on average. For those aged 22-29, this impact is particularly significant, increasing pots to around £114,000 at retirement.
Scottish Widows’ analysis shows that among defined contribution members saving below 12%, should the level of contribution increase from 8% to 12% across total salaries, it would drastically reduce pension poverty from 32% to 13%.
If the increase were applied only to the first £50,000 of salary the average pot would increase to £55,000, with pensioner poverty reduced to just 14%.
The remaining 13% at risk of pension poverty are mainly self-employed, part time or unemployed people.
As such, Scottish Widows is urging the government to create an equivalent of auto-enrolment for the UK’s 4.39 million self-employed.
Additionally, the firm believes there should be accelerated compatibility between pensions and personal financial products such as savings and investments.
Glancy added: “The way people are working continues to evolve, but our retirement system still lags behind. This year we have modelled the impact of some policy changes only on the youngest workers as this gives us the best indication of the long-term benefit applying not only to them, but all future generations yet to join the workforce.
“We must also ensure that choosing flexibility today – through self-employment or part-time work – doesn’t come at the expense of tomorrow. Extending auto-enrolment to the self-employed, as is one of our recommendations to the Pension Commission, is critical and should be implemented at pace to close this gap in retirement saving.
“Most people are unlikely to have enough in their pension pots alone to fund their desired retirement, so pensions can no longer be viewed in isolation. Considering pensions alongside other savings, investments and housing wealth – and advancing the Government’s Open Finance agenda – will be key to improving retirement outcomes for all.”
Commenting on the report, Angeline Ong, senior technical analyst at IG, said: “While recent figures from Scottish Widows suggest an 8% decline in the number of people facing pension poverty, the underlying picture remains deeply concerning. Many people simply save less than they think they need for retirement, not through neglect, but because inflation and regulation steadily erode the value of their pension pot.
“One encouraging trend reflected in the Scottish Widows data is that many people who are not building wealth through traditional workplace pensions are finding other ways to save and invest.
“Building a stocks and shares ISA alongside a pension can play a critical role in closing that gap before pension access begins. Workplace pensions remain highly valuable, particularly where employer contributions are matched, but ISAs offer greater flexibility and tax-efficient access to capital when needed. The most effective approach is usually a balanced strategy that takes into account earnings, retirement ambitions, and future tax exposure.”
Mark Futcher, head of DC pensions at Barnett Waddingham, added: “The most frustrating part of these findings is that none of this is new. We’ve spent years identifying the cracks in the system, yet too many people are still falling through them. And while it’s positive to see some progress, at some point we have to stop admiring the problems and actually fix them.
“But this also only tells half the story. While most of the focus rightly remains on helping people build pension pots during their working lives, the options available when they actually retire are still relatively blunt – cash, annuity or drawdown.
“For most people, retirement isn’t just a moment in time, it’s a journey, and yet too many people are effectively being handed a map with only three routes on it. Fixing auto-enrolment is a great start, but if we want to stop the pensions ‘timebomb’ from blowing up in our faces, we need fixes at both ends of the system.”
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