Low earners in the UK risk being caught in a “double-edged” pensions dilemma, with some saving too little for retirement and others saving more than they can afford during working life, according to new research from the Pensions Policy Institute (PPI).

The report, From Payslip to Pension: Practicality of Saving for Low Earners, is the second publication in the PPI’s ongoing series examining how life circumstances shape the ability of people earning below the living wage to save for retirement.

The study highlighted how automatic enrolment, while designed to protect those on lower incomes, may be failing to reflect the financial diversity of low earners across the UK.

Using data from the Understanding Society survey, the PPI modelled four representative “life courses” to illustrate the different realities facing lower-paid workers.

These ranged from persistent low earners in high-income households to those living close to the poverty line, to young, hourly-paid men in precarious employment, and early-career women whose incomes rise later in life.

Together, these examples revealed the tension between affordability during working life and adequacy in retirement, showing that the same pension rules can have vastly different effects depending on personal and household circumstances.

The research found that low earners with high household incomes - typically women who move to part-time work in mid-career but remain in financially secure households - are often able to save more than they currently do.

Under current thresholds, such workers contribute only modest amounts, often under £500 a year, even though they may need a much larger pension to sustain their standard of living later in life.

“Current policy encourages these low earners to save modest amounts, when they may in fact need to be saving more to build an adequate pension,” the report noted.

By contrast, the findings showed that persistent low earners in low-income households are at risk of being pushed into hardship by pension contributions.

Many remained close to or below the relative poverty line even after benefits were factored in, and for some, contributing to a pension may reduce the immediate income they need.

The report warned that these savers could be “oversaving,” with retirement incomes - once the state pension and pension credit are included - potentially higher than what they earn in work.

“Encouraging this individual to save poses a significant risk of reducing working-life income that is needed immediately,” the PPI said, adding that even modest contributions can “significantly impact living standards.”

PPI policy analyst and report author, John Upton, warned that the findings highlighted the complexity of designing fair and effective pension policy for such a varied group.

“Low earners that appear similar on paper can have significantly different financial circumstances and risks,” he said.

“Some are under-saving and risking inadequate retirement income, while others may be contributing more than is sensible given their current financial pressures.”

The study also emphasised that young and hourly paid workers remained less likely to be members of a pension scheme, particularly where income fluctuates.

These individuals, often in temporary or gig-based roles, experienced greater financial insecurity and lower awareness of workplace pensions.

Citing Department for Work and Pensions (DWP) research, the report noted that those in precarious jobs often described “ad hoc relationships with employers and poor communication about benefits, including pensions.”

The PPI warned that instability and youth were both strong predictors of lower pension participation, with some workers effectively excluded from saving through no deliberate choice of their own.

In addition, gender continues to play a significant role in the persistence of low earnings, with women far more likely to spend extended periods earning below the living wage, often due to caring responsibilities.

Indeed, the PPI’s earlier analysis found that some women may spend over 20 years of their career in low-paid work, limiting their capacity to build retirement savings.

However, greater access to defined benefit (DB) pensions in the public sector helps narrow the gender pension gap by around 10 per cent, offering some protection to female low earners.

Overall, the report concluded that automatic enrolment in its current form struggles to meet the needs of this diverse population, arguing that while the system shields some households from over-saving, it simultaneously limits the long-term security of others who could afford and benefit from contributing more.

The PPI suggested that future reforms may need to better reflect household income, life stage, and employment stability, rather than relying solely on individual earnings.

“To understand what the best course for future pensions policy is with regard to low earners, more evidence is needed,” the report stressed.

This article was first published on our sister website, Pensions Age.

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