13th March 2015
If you want a decent retirement you must double the amount you save into your pension, says Lord Hutton.
Former Labour pensions minister Hutton said savers must put aside 15% of their pay to create a comfortable retirement for themselves. Although five million people have started saving for old age through auto-enrolment, and another four million are set to join over the next three years, the amount being saved is not enough.
The mandatory contribution through auto-enrolment, which employees can opt out of, will rise to 8% in 2018 – made up of 4% employee contribution, 3% employer contribution and 1% government tax top up.
However, Hutton said even the increase to 8% will not be enough and a national saving target of 15% of annual salary should be introduced.
‘The government has sensibly introduced auto-enrolment to ensure UK savers have a basic level of income in retirement,’ he said in a report, Age of Responsibility, published with pension consultancy Redington.
‘However, sustaining a comfortable retirement requires a higher servicing level in the context of the decline of state and defined benefit pensions. The government has gone some of the way – but they need to do more to foster a dramatically different savings culture. Having a national savings target will help drive the future pension reform agenda.’
The report says that a savings target may need to go beyond 15% to ‘between 15% and 20%’ in order to secure decent retirements. Much of the need to save more is down to changes in the state pension, says the report.
‘The state pension landscape has changed since the 8% level was set,’ it said. ‘The focus of the state pension has moved away from maintaining living standards and towards poverty prevention. This new environment requires a rethink. Our solution would be the introduction of a national retirement savings target.’
The editors of the report also advocate a ‘five a day’ style campaign to encourage workers to save 15% of salary as a first step.
‘This has the potential to get the social norms around ‘savings behaviours’ moving in the right direction,’ said the report.
‘It may be that 15% is just not feasible for many workers, however, we believe that having this benchmark in mind will encourage savers to reach higher savings rates than they otherwise would.’