Raising the minimum pension contributions under the auto-enrolment (AE) scheme to 12 per cent could significantly improve retirement savings for workers by £217,000, according to Standard Life.
According to Standard Life’s analysis which predicts the impact for a worker earning £25,000 per year, increasing minimum contributions from 8 per cent (5 per cent employee, 3 per cent employer) to 12 per cent (6 per cent employee, 6 per cent employer) may increase their pension pot by £217,000 by retirement age.
This analysis comes as the government launches a Pensions Review to evaluate the adequacy of long-term savings and potential policy reforms, such as increasing AE contributions, to improve retirement outcomes for UK workers.
Auto-enrolment marks its 12th anniversary in October and, according to Standard Life, while it has significantly increased pension enrolment, increasing contribution rates may improve workers’ retirement security by balancing short- and long-term needs.
Standard Life managing director for workplace pensions Gail Izat says: “It’s great to see the Government include savings adequacy in the second part of their Pensions Review. As we approach auto-enrollment’s 12th anniversary, it’s important to celebrate the achievements of the scheme while acknowledging that we need to do more to help people secure a decent standard of living in retirement. Our calculations show that raising minimum contributions could be a powerful way of setting people up for pensions success and future financial wellbeing, benefiting both employees and businesses in the long term.
“In other countries like Australia, where minimum contributions are set to reach 12 per cent from next July, higher contributions have led to greater savings adequacy and a higher anticipated standard of living in retirement than the UK.”
Phoenix Insights head of research analysis and policy Patrick Thomson says: “As many as 17 million UK adults are not saving enough to retire when they want on the income they want, so a plan to increase minimum auto-enrolment contributions is crucial to addressing widespread under saving. Auto-enrolment has been an important policy to boost pension participation, but the current minimum rate is unlikely to provide most people with enough savings to achieve the income in retirement that they want or expect.
“Engagement with pensions is low and there is a risk that people are lulled into a false sense of security that the statutory contribution rate will provide enough savings for their retirement needs. We hope the Government’s review of pension adequacy will pave the way for an increase to minimum contributions when the economic conditions are right.”
