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Three years into auto-enrolment and we're still not saving enough

The gap between pensions savings and a comfortable retirement is widening.


by Michelle McGagh on Oct 05, 2015 at 11:50

Three years into auto-enrolment and we're still not saving enough

Auto-enrolment has celebrated its third birthday and while more people than ever are saving, they’re still not saving enough.

Last week also marked the first ‘staging date’ for 1.8 million small businesses to automatically put their employees into a pension scheme – large and medium companies have already implemented auto-enrolment. This means around five million more people will be saving into a pension for the first time.

In order to qualify for auto-enrolment, a worker must be over the age of 22, not currently paying into a pension, and earn more than £10,000 a year.

Although everyone is entitled to opt out of paying into a pension the government is hoping people don’t and that by 2018, when auto-enrolment ends for existing employers, around 10 million more people will be saving for retirement.

The minimum amount saved into an auto-enrolment pension is set by the government and will increase over time. At the moment it is around 2% of salary, made up of 1% employee contribution, 1% employer contribution and 0.2% tax relief from the government.

By 2017 the contribution levels will be increased to 8% - made up of 4% employee contribution, 3% employer contribution and 1% tax relief.

Saving rates falling

Despite the commitment to get people to save more, the introduction of auto-enrolment has actually reduced the average amount people are saving into their pensions. The average contribution into a workplace pension has fallen from 9.1% to just 4.7%.

The average will climb back up again when the government starts increasing contribution rates but there are widespread concerns that saving 8% of salary will not be enough to secure a comfortable retirement.

Calculation from Royal London show the average 35-year-old needs to save £660,000 into their pension in order to maintain the same standard of living as a pensioner today.

Worryingly, the average pension size for those aged 30-to-40 is just £14,000.

Royal London figures on the cost of retirement in 2050 show the extent of the pension problem.

The current average monthly expenditure of a pension today, who is not reliant on the state pension, is £1,084 but by 2050, when a 35-year-old is likely to retire, the same level of expenditure will cost £2,930 thanks to inflation.

Fiona Tait, pensions expert at Royal London, warned a retirement spent in poverty awaited those who did not save enough and that the scale of the challenge was ‘quite frightening’.

She added that while £2,930 a month was what individuals should be aiming for ‘it is very likely that future pensioner spending will be higher than this and so they need to start saving more now’.

Tait said not enough people realised just how far their pension would have to stretch and why auto-enrolment contribution rates weren’t high enough.

‘Too few people…recognise that their income may need to last over 20 years in retirement,’ she said, adding that auto-enrolment savings levels were ‘still not adequate’.

Don't opt out!

Auto-enrolment could be the first step to saving adequately for retirement, as long as workers do not opt out.

Although opt-out rates remain low at around 10%, those who decided not to save ‘walked away’ from £200 million from their employers and the government.

According to the government's pension scheme, the National Employment Savings Trust (Nest), the half a million people who opted out of saving missed out on £35 million of tax relief from the government and £170 million in employer contributions.

Those who opted-out the first time round will now be automatically enrolled again, which will happen every three years.

Helen Dean, chief executive of Nest, encouraged those people auto-enrolled for the first and second time to stay in their pension scheme.

‘For those who didn’t stay in their pension scheme the first time round, re-enrolment gives them a second chance to benefit from employer contributions and tax relief,’ she said. ‘We know support is rising for auto-enrolment. This is the time for those who opted out, stopped saving, or who are just about to be enrolled for the first time, to ask themselves: "Do I really want to walk away from this money?".’

2 comments so far. Why not have your say?


Oct 05, 2015 at 20:40

I have said it before and I'll say it again - allow commission on regular premium pensions and Isas. Saving is not a bad thing but to justify the sale it takes too long with a lifetime of liability. No adviser I know looks for regular premium business it isn't cost effective.

Quite why I have to justify a pension for someone when they can sign up for a credit card and buy a £2000 handbag and get in debt beggars belief.

No one is pushing people into pensions including financial advisers.

The last wave of people that started personal pensions are now in their late 40s.

Most below 40 have terrible pension plans.

But, it's not our problem. I do my best where possible but dealing with people and trying to convince them to start saving for retirement is tough, hard work, thankless, time consuming and simply not worth it financially.

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Frank Frank

Oct 06, 2015 at 01:10


May be the reason people are not taking your advice is because they know you have a vested interest. Can you blame them?

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