Six years on from the launch of auto-enrolment, more UK workers are saving for retirement than ever before. But while this might appear to indicate that the country’s workforce has at last realised the importance of saving for the future, it may actually be little more than evidence of how apathetic most Brits are about their finances.
Auto-enrolment was launched in 2012 and meant that workers aged 22 and over earning over a certain amount, currently £10,000, would be automatically opted in to their company’s workplace pension scheme. While the option to opt back out is available, it was hoped that apathy would keep most workers saving; a theory which has largely been proved correct.
Latest figures show around 9.3 million people in the UK are now saving for retirement. Crucially, fears that this number would tumble when the minimum auto-enrolment contributions were increased in April from 1% to 3% of a worker’s salary have not yet materialised – although numbers may well fall when the minimum rises again in April to 5% of a worker’s salary.
But there are concerns that the high level of savers may actually be because most workers don’t even realise they are contributing to a workplace pension scheme. The Office for National Statistics Wealth and Assets Survey reveals that while 91% of eligible employees are now contributing to a pension, only 63% have realised they are doing so.
Young People Unsure About Pensions
Kate Smith, head of pensions at Aegon, says it is “disappointing” and suggests more needs to be done to get people talking about and saving for retirement.
The ONS survey found that 13% of people believe they don’t know enough about pensions to save into one. Meanwhile, 7% of people think it’s too early to start saving for retirement and 3% think it’s too late. Those aged between 16 and 24 feel the least equipped when it comes to making decisions about pensions.
Other reasons given for not contributing to a pension scheme include: not being able to afford to do so, cited by 27% of those surveyed, not trusting pension schemes, at 5% . Some 3% and savers not expecting to live long enough to benefit from their pension savings.
Worryingly, even those who are saving are likely not putting enough money aside for the future. Sean McCann, chartered financial planner at NFU Mutual, says: “Auto-enrolment is a big step in the right direction but, even though total contributions will rise to 8 per cent in April 2019, this is unlikely to give most people the income they need in retirement.”
He says a good rule of thumb is to contribute half of your age as a percentage of your income, meaning a 30-year-old should be contributing 15% of their salary and a 40-year-old 20%. But this is likely beyond the reach of most savers, many of whom will be paying off a mortgage or student loan as well as household bills. Yet research shows that even increasing your monthly pension contributions by a small amount can make a big difference over time.
Extra 1% Makes a Difference
Indeed, analysis by Fidelity reveals that contributing an extra 1% of your salary could give you at extra £60,000 at retirement. It says a 30-year-old earning £30,000 could save an extra £58,273 by the time they retire at age 68 by adding an extra 1% of their salary to their savings – the equivalent of just £6 a week, or £4.80 when basic rate tax relief is considered.
The fund house based its figures on the assumption that you achieve a return of 5% a year on your investments and get a pay rise of 3.75% a year. Those closer to retirement may fear they have left it too late to make a difference but Fidelity found a 40-year-old earning £40,000 could boost their pension pot by £37,169 by adding another 1% of their salary, and £74,339 by contributing an additional 2%.
Meanwhile, a 50-year-old earning £50,000 could add £19,415 or £38,829 to their retirement savings by contributing an extra 1% or 2% of their salary respectively to their pension pot. This extra money is likely to becoming increasingly important as people live longer in retirement. There are expected to be 3.2 million people aged 85 and over by 2041 and that means people’s pension pots are likely to have to last decades.
Ed Monk, associate director at Fidelity International, says: “Making a small change to your contributions can make a big difference. None of us really know how long we’ll live or what spending demands will be placed on us during retirement, which could last many decades, so it really does make sense to save as much as you can afford.”
