The retirement income gap no-one is talking about

We are living longer lives, but not necessarily healthier ones and this creates hidden horrors for our retirement planning. According to recent government data, healthy life expectancy is less than 63 years old for both men and women – a full three years less than the current state pension age of 66. This raises the very real prospect of people being too ill to work but too young to get their state pension.

The state pension forms the very foundation of people’s retirement income. It currently stands at £11,502 per year for someone in receipt of the full amount. This would give a gap of almost £35,000 for someone needing to fill the three-year gap today – more if you add in the annual increases from the triple lock. This is an enormous chunk of money that many will struggle to find.

Read more: What is the true cost of the UK state pension?

It demonstrates the huge importance of saving what you can into your pension, so you are able to deal with any challenges you face in later life. You can draw an income from your self-invested personal pension (SIPP), personal or workplace pension from the age of 55 (going up to 57 in 2028) so this could really help bridge the gap during those years. However, with state pension age on the rise it needs careful planning to make sure you don’t run out of money.

This is no doubt a frightening prospect but it’s well worth saying that auto-enrolment means more people will be saving into their workplace pensions for longer. These larger pensions over time will lead to better retirement incomes that should make up some of the gap.

Let’s also not forget the role employer contributions as well as government tax relief can play in taking the sting out of these figures. There are employers who contribute more than auto-enrolment minimums and may also boost their contributions if you increase yours – the so-called employer match. It’s well worth checking to see if your employer does this as it can lead to significant uplift to your contributions without necessarily much extra coming from you.

Taking the opportunity to increase your pension contributions whenever you can – for instance when you get a pay rise or new job, can be a great way of boosting your pension relatively painlessly.

Read more: How to avoid tax creep in retirement

You can also save into other vehicles to bridge the gap and make sure early ill health does not derail your retirement plans. You might not get employer contributions to an ISA as you would a pension, but you can still build up a decent amount over the long-term and any income can be taken tax free.

A lifetime ISA will also attract a government bonus of 25% on contributions up to £4,000 per year which can significantly boost your savings. However, you also need to be aware that if you have to access your lifetime ISA for reasons other than purchasing a first home or before age 60 then you will be subject to a 25% penalty.

Watch: Rishi Sunak insists no cuts to state pension to fund national insurance ambition