9th January 2015
Failure to save consistently and early on into a pension could mean young workers end up with a retirement income of less than the minimum wage to live on.
According to research by financial education organisation RedStart, a person aged 20 earning £20,000 a year could make pension contributions of 6% of their salary until age 65 and have a pension of £10,500 a year, short of the current £11,574 minimum wage.
The figure includes the full state pension, which is currently £5,901 a year, meaning the individual’s pension is generating less than half of the income.
The figures only worsen as individuals get older, meaning they need to save even more if they leave pension saving until later in life.
A 30 year old who earning £20,000 who has only just started saving you have to put away 11% of their salary into their pension in order to generate £10,500 a year in pension income.
RedStart said it was concerned that auto-enrolment, which is forcing workers into saving for retirement, only has a currently contribution rate of 2% which is ‘vastly under what is required’.
Those who want to enjoy a ‘living wage’ of £7.85 an hour or just over £15,000 a year – the estimated amount needed to cover living expenses – in their retirement, will need to save even more.
A 20 year old on £20,000 would need to save a pension pot of £200,000 by the age of 68 – meaning they would need to put away 12% of their salary each year.
A 30 year old would have to increase contributions to 17% of salary to achieve a living wage.
For those who want to push their retirement income up further to the current average salary of £26,500, they must save a pension pot of £400,000.
This would mean a 20 year old earning £20,000 would have to save a quarter of their wages until age 68 and a 30 year old would have to save 35%.
‘The message is stark: if savers want to enjoy a pension requirement above the minimum wage, they need to start early and contribute regularly,’ said Jonathan Letham, co-founder of RedStart.
‘Currently, the government’s minimum requirement [under auto-enrolment] will leave a good deal of young savers with annuities less than the minimum wage.’
Eventhough the auto-enrolment minimum contribution will rise to 8% in 2018, Letham said it is still not enough and encouraged people to start saving earlier to give themselves the best chance of a comfortable retirement.
‘If you wait until your thirties, you see how difficult it is to make up ground on contributions,’ he said. ‘A 30 year old would have to earn £50,000-plus with a 5% contribution just to receive the minimum wage in retirement.
‘Young savers also need to think about the appropriate level of contribution relative to their salary. Depending on their expected lifestyle and family obligations, government guidelines may not be enough.’