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Brits must double their pension contributions to avoid living in poverty in retirement, former Labour pensions minister Lord Hutton has warned. In order to secure a comfortable retirement, savers must put aside 15% of their annual salary – or risk losing basic public services such as the NHS.
Auto-enrolment has gone some way to plug the pensions gap in the UK, adding five million people to workplace pension schemes since it began in October 2012. Currently the minimum required employee contribution is just 1%, which is then matched by the employer. This will automatically rise to 8% of salary in 2018, but Lord Hutton says even this is not enough. He proposes introducing a national savings target of at least 15% to ensure that poverty in retirement is erased.
“The government has sensibly introduced auto-enrolment to ensure UK savers have a basic level of income in retirement,” he said.
“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.”
Lord Hutton was speaking at an event to launch The Age of Responsibility report, which brings together contributors to map out a solution to pensions deficit.
He especially urged younger workers who have not benefitted so successfully from the housing boom and wage inflation to up their pensions contributions, as these younger demographics would enjoy substantially longer periods in retirement.
The Difficulty With Saving
While the resounding message from The Age of Responsibility report was that we all need to save more, many contributors recognised the challenge that this is to many UK households.
Felicity Algate of the Behavioural Insights Team said that persuading people to do something now that they feel no immediate benefit for is difficult.
“When talking about pensions you also have to ask people to think about death, which is never an easy subject to package,” she said. “We need to make pension saving easy, attractive, social and timely. We need to think about incentives, and encourage people to commit publically to saving for the future in the way that they do when running a marathon or giving to charity.”
Another contributor and fellow behavioural specialist Pete Brooks of Barclays said that while auto-enrolment should be applauded for helping people save for retirement the system was not flawless.
“Auto-enrolment took one decision out of consumers’ hands – whether or not to invest, which is great. But it then presents them with three others; how much to save, which investment to choose and when to drawdown those savings, which can be overwhelming,” he said.
Brooks also recognised that the vast leap from 1% minimum required contributions to 8% contributions overnight will result in some members opting out of pension schemes as it goes against behavioural law.
“An arbitrary increase is dangerous. Instead increases should be linked to pay increases, so that members do not notice the difference to their pocket,” he said.
