22nd October 2013
Millions of Britons are potentially facing an impoverished retirement, as research shows that saving just the minimum contributions into the government’s new workplace pension is not enough writes Philip Scott.
A new report from the Pensions Policy Institute (PPI) found that the typical worker saving only the basic contribution rate of 8% of earnings throughout their working life, will have a less than fifty-fifty chance of achieving an adequate retirement income.
The new system, which began rolling out in October last year, called ‘auto-enrolment’ means that firms which previously did not offer a pension plan to their staff, now have to. Although employees can, if they wish, opt-out of the plan, for the millions who are expected to remain signed up, they will contribute some 4% of their pay, while the employer puts in 3% and the government adds in a further 1% via tax relief.
By 2020 it is forecast there will be 16m adults saving into these workplace pensions. The vast majority will be invested in defined contribution plans and the amount of pension you get out depends on stock market returns – there is not promised amount or percentage of salary as with defined contribution plans.
Already 12m UK adults are currently estimated to be not saving enough for their retirement.
The analysis from the PPI shows that the chances of saving enough for a comfortable retirement, with just an 8% contribution are highly unlikely. Chris Curry, PPI director says: “In general, individuals will need to contribute more than the minimum level at which they are likely to be automatically enrolled to have a good chance of achieving an adequate retirement income.”
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An average earner who starts saving at age 22 and contributes continuously until reaching State Pension Age will need a total contribution from employee, employer and Government of 11% of band earnings to have a two in three chance of receiving an adequate retirement income.
Curry adds: “However, there is not a single contribution rate that will mean that everyone will have an adequate retirement income. Lower earners may be able to contribute less than the hypothetical median earner, as a greater proportion of their income is provided by the state. But higher earners, those who opt-out early in their career and individuals with career breaks need to contribute more than the median earner to have a two in three chance of achieving an adequate income in retirement.”
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Research from financial adviser and fund broker Hargreaves Landown found that for a 22 year old to have a 75% chance of an ‘adequate’ pension, contributions need to increase from 8% of earnings to 12%. For a 40 year old, contributions would have to increase to 26% of earnings.
Tom McPhail, head of pensions research at Hargreaves Lansdown says: ‘There are some relatively simple things we can do to improve retirement provision. We have to talk to people about their savings. The auto-enrolment schemes with the lowest opt-out rates have been the ones that made the effort to explain to their employees what was going on. Everyone needs to be able to take responsibility for their own retirement; otherwise they’ll end up having to work on into their 70s.
“Whatever we do now, there are already millions of workers in their 40s, 50s and 60s today who will not be able to save enough to retire at all comfortably in their mid 60s. Employers, individuals and the government all need to look at ways to extend working lives through more flexible and adaptive work practices.”