Millions of people making minimum AE contributions believe they are saving enough for retirement, according to new research, despite evidence suggesting this will provide just a basic standard of living.
B&CE, the company behind The People’s Pension, found that just 7 per cent of those making these minimum contributions are aware they are only saving enough for a ‘basic’ retirement. In contrast the vast majority of these savers said this money should be enough to provide for a‘moderate’, or even ‘comfortable’, retirement.
Worryingly, the research found four in 10 people believe that because the contribution rates have been set by the Government, they are saving enough.
This new report Pension Adequacy: A Pension Saver’s Perspective, found that more than half of (57 per cent) of auto-enrolment pension savers are making the minimum employee contribution that is required by law, and almost two thirds (65 per cent) are receiving the minimum contributions from their employers.
The research, conducted by Ignition House, shows that, in many cases, auto-enrolment contributions are people’s primary source of savings.
The minimum contribution rate of 8 per cent of band earnings is likely to only provide a ‘basic’ level of retirement, according to the Pension and Lifetime Savings Association’s Retirement Living Standards, which outline that savers will need £10,900 for a basic level of retirement, £20,800 for a moderate level of retirement and £33,600 for a comfortable level of retirement for a single person.
Phil Brown, director of policy at B&CE, says: “For most workers across the UK, saving something for retirement is better than saving nothing at all – particularly considering your employer also contributes. But we can’t escape the fact that millions of hardworking people are not saving enough for the level of retirement they expect.
“Affordability obviously plays a role in this, but the research is clear that in most cases, people believe that because they’re saving what they’ve been told to by those who run the country, they’re saving enough.”
The Pension Commission, in 2005, reported that contributions of around 16 per cent of band earnings would be required to reach an adequate retirement income, around two thirds of someone’s pre-retirement earnings. It was thought half of this would come from auto-enrolment, and the other half from additional voluntary saving.
Following this report B&CE is calling on the Government to set out plans for a review of the minimum contributions required for auto-enrolment and to outline a timeline for implementing the recommendations of the 2017 automatic enrolment review, which called all workers aged 18 and over to be included in AE, and contributions to count from the first pound earned.
While there is growing evidence that the minimum contribution needs to increase, B&CE is warning that careful consideration must be given by Government as to whether this is the right course of action, and if so, what level they should be set at, and who should shoulder the burden of an increase – the employer or employee.
While low contribution levels are, in part, due to a lack of saver awareness, a substantial proportion of pension savers are already struggling to cover their day to day living expenses and are worried about the rising costs of living.
The research found that 15 per cent of pension savers reported that they have fallen behind on, or missed, at least three payments for credit commitments or domestic bills in the last six months and 15 per cent are constantly overdrawn by the time they are paid.
The report found that against a backdrop of rising inflation, almost half of savers felt that they would need to opt out if employee contribution rates were set any higher, and many savers felt employer contributions should at least match what the employee currently pays.