Auto-Enrolment increases number of savers, but are they saving enough?
Statistics from the Office for National Statistics (ONS) have shown that a record number of savers are now members of workplace pension schemes.
The figures show that the proportion of employees who are contributing to a company pension has risen significantly in the five years since Auto-Enrolment (AE) began.
AE was introduced in 2012 and makes it compulsory for employers to automatically enrol all eligible employees into a pension scheme unless the employee actively opts out. An employee is eligible for AE if they are aged between 22 and the state pension age and have a salary of more than £10,000.
In 2012, prior to AE, 47 per cent of UK employees were enrolled on a company pension scheme. This figure has now risen to 73 per cent in 2017. In other words, there are over 9.5 million more people saving for their retirement than there were five years ago, and it's mainly thanks to AE.
Participation in a pension scheme has increased most among young workers (2017 saw 63 per cent of workers in the private sector aged 22-29 paying into a defined contribution pension, compared to just 16 per cent in 2012) and those on lower salaries, most of whom had no active workplace pension before AE was introduced.
While it is obviously positive that more people than ever before are putting money away for retirement, the data from the ONS has also raised some concerns that the sums people are saving still may not be enough to enable comfortable retirement income, and some might be in for an unpleasant surprise if their contributions do not rise much beyond the minimum, legally required level.
Initially, the minimum contribution was 2 per cent of a worker's qualifying earnings, which included the employer's contribution of 1 per cent. In April, this rose to 5 per cent and will rise again to 8 per cent next year, of which the employer must pay at least 3 per cent. The ONS said that the level of contributions "clustered" at these lower levels, meaning that many workers will not have saved a sufficient sum when they reach retirement age.
Sir Steve Webb, director of policy at Royal London and former pensions minister commented that, though encouraging to see the number of pension savers increasing, it is too early to start celebrating as a "combined contribution rate of 8 per cent between worker and firm is simply not good enough for most people".
Webb went on to say that the AE scheme will have to do more to support workers and employers if contributions are to rise to more "realistic levels", such as ensuring that people's contributions increase automatically whenever they get a pay rise, so that today's workers aren't "unable to afford to retire".
Similarly, Alistair McQueen of Aviva believes that the minimum level should be increased further to be nearer to 12 per cent.
So, while saving at the minimum amount is better than not saving at all, it's possible that Auto-Enrolment is leading people into a false sense of security, as many workers in the scheme may not realise that the amount they're putting into their pension pot isn't enough.
Pension savers in the UK can do much to take a more active role in their retirement planning. The first thing to do is to undertake a pension planning review with a financial adviser who will be able to assess your pension pot and offer suggestions for maximising your funds, particularly if you are a member of a number of schemes with relatively small sums.
A pension review can help you understand what sort of income you could look forward to in retirement and also suggest ways to enhance this, perhaps by making a pension transfer into a more beneficial scheme such as a SIPP, or QROPS for expats.
Blacktower's financial advisers can help. Contact us today to find out how to boost your pension savings and look forward to a more financially secure retirement.