The Policy Exchange think tank has proposed a ‘Help to Save’ scheme to defuse the demographic time-bomb which will see 11 million people enter ‘pensioner poverty’ when they retire.

Under the plans, the opt-out in the Government’s auto-enrolment scheme would be removed making it obligatory for people to save for their retirement

Individual pension contributions would also increase as incomes rise over time.

According to the report, someone earning the average wage – £27,000 – will need to save over six and a half times more than they currently do to generate the Government’s recommended retirement income of £16,200.

The average pension pot is estimated to be just £36,800, which on current annuity rates is enough to generate a retirement income of £1,340.

The paper said that an average earner would need a pot of £240,000, assuming they receive the full single tier pension.

While the think tank said it supported the recent introduction of auto-enrolment, it warned that even with 8% contributions flowing into a pension on a regular basis people will not be able to save enough for their retirement.

Over a 40 year contribution period, using the 8% contribution rate, someone earning £27,000 would likely be able to save around 55% of what they need to generate the target retirement income. That figure drops to 40% if that individual takes their tax free lump sum when they retire.

Dr Ros Altmann, an independent pensions expert and former government adviser, said: “Solving the pensions crisis is essential. Action must be taken to avoid increasing numbers of older people living on inadequate incomes. Ensuring that people contribute more than the auto-enrolment minimum is certainly important to deliver better pensions and using pay rises to fund higher contribution levels is the best approach.”

The think tank also recommended a major shakeup of the annuities market to increase choice when people hit retirement age.

It said the Government should issue annuity type government bonds, which retirees could buy instead of normal annuities. This would give clarity on the interest rates that were available in retirement

James Barty, author of the report, said: “People are not saving enough for their retirement. This is putting an intolerable burden on the state which needs to be addressed sooner rather than later.

“With an ageing population, putting money aside for later life should be seen in the same context as National Insurance contributions, taxes and even education – an obligation that falls on everyone in society.

“‘Help to Save’ will prevent the state from having to pick up the tab for people who haven’t put aside enough money for later life.”