Rising levels of inequality, together with persistent gaps in pensions coverage and contributions, are leading to growing retirement inequality, the Pensions Policy Institute has warned.

In its report published on Wednesday, ‘Red Sky in the Morning?’ – the fourth edition of the UK Pensions Framework sponsored by Aviva – the PPI argues that focussing on retirement income alone misses growing divides among pensioners.

The UK pension system has reached a “juncture” and the government’s Pensions Review comes “at a critical time”, senior policy researcher Anna Brain said, suggesting policies will need to “build on success, target at-risk groups, strengthen safety nets and reflect emerging risks associated with differences in wealth, health, housing and employment”.

Brain said growing wealth gaps look set to widen in retirement, challenging the assumptions embedded in the UK pension system around home ownership and emergency savings. The proportion of households renting privately through later life is expected to rise by 1.2m to 1.7m by 2040, and fewer than one in five of these will be able to afford the rent on even a modest home through retirement, the PPI warned.

The Institute for Fiscal Studies published research in July which found pensioner poverty and inequality are creeping up, finding that poorer pensioners have fallen behind since 2011 as their incomes have risen less than those of middle-income pensioners, and are increasingly ineligible for means-tested support because of the triple lock. Low take-up of pension credit is another contributor to poverty. The government has sought to increase the numbers claiming pension credit when it made winter fuel payments means-tested.

At the end of 2022, single pensioners had an average weekly income of £239, and couples £515, according to the Department for Work and Pensions. While pensioner incomes have come down slightly, pensioners are still the age group least likely to experience poverty, along with childless working age adults, according to the Joseph Rowntree Foundation. Children are most at risk of poverty, with about a third of the UK’s children currently living in poverty. Among adults, people aged 60-64 now have the highest rate of relative poverty as the state pension age has gone up, the Centre for Ageing Better has found.

However, the PPI’s research highlights that the reduction in pensioner poverty seen over the past few decades could now be at an inflection point. Although auto-enrolment and the new state pension are helping to close historic savings gaps and lift retirement income among the poorest pensioner households, Brain argued that progress towards better outcomes is under threat from differences in health, wealth, housing and work.

The gap in life expectancy between the most and least deprived areas of the country has reached 10 and the gap in healthy life expectancy 18 years, while the share of working-age adults with a disability rose from 16% in 2012-13 to 23% in 2022-23, the PPI points out. Health inequalities mean that it is harder for people from poorer backgrounds to have an uninterrupted career. Those working for large employers receive higher employer contributions and are more likely to save into a workplace pension than those employed by small or medium enterprises, the PPI also noted.

“Overall, we know that the income and employment gaps we see across the population today will become the pension gaps of tomorrow," said Brain. “We should treat changes to inequality and saving patterns as an early warning system that can signal widening differences in living standards ahead.”

Michele Golunska, MD of wealth and advice at Aviva, said the report is a reminder that “tomorrow’s retirement challenges are shaped by today’s trends in health, wealth, housing, and employment”.