18/03/19Auto-enrolment increases, but many still won’t be saving enough
Auto-enrolment has been hailed a success in getting workers to save for their retirement. However, as minimum contributions are set to rise, there are concerns more will opt out and figures highlight many still won’t be saving enough to support them once they give up work.
While auto-enrolment may not be an issue affecting you, it’s likely having an impact on the way your children or grandchildren are saving for retirement.
What is auto-enrolment?
Auto-enrolment means the majority of workers in full-time employment in the UK are automatically enrolled in a Workplace Pension, making at least minimum contributions. The initiative aimed to ensure more employees are actively saving for their retirement. With the number of Final Salary pensions offered to employees falling, the responsibility for saving for retirement has shifted to the individual.
Since launching in 2012, ten million UK workers have been auto-enrolled into a Workplace Pension. As a result, the policy has been considered a success. Minimum contribution levels have already increased once, and are now just weeks away from rising again for the tax year 2019/20. It’ll mean those currently paying the minimum levels will see the amount being taken from their salary increase each month. There are some concerns that it may lead to more employees opting out of their pension, putting future financial security at risk.
|Date||Employer minimum contribution||Employee minimum contribution||Total minimum contribution|
|April 6 2018 – April 5 2019||2%||3%||5%|
|From April 6 2019||3%||5%||8%|
However, even with minimum contributions increasing, it’s projected that millions will still be undersaving. According to NOW: Pensions, around 12 million people relying on a Workplace Pension could find they face a shortfall when they reach retirement age. The figure is equivalent to 38% of the working age population.
While undersaving is an issue that affects those in low paying positions, it’s also a concern for many others. The research indicates that 87% (10.4 million) of those identified as undersaving earn more than £25,000 annually. As a result, many graduates and other professionals could be on track for a retirement that’s less financially comfortable than thought.
Encouraging loved ones to engage with their pension
If your children or grandchildren are thinking of opting out of their Workplace Pension or relying on the minimum contributions to provide a comfortable lifestyle, encouraging engagement with their savings can help. The sooner workers get to grips with their pension and understand what it means for retirement, the more likely they are to achieve their goals. So, how can you help?
Explain the benefits of increasing contributions: For younger generations paying off a mortgage or rent, increased pension contributions can seem like an expense they can’t afford. However, once you look at the benefits, such as increased tax relief and compound investment returns, it can often be viewed as a prudent, long-term investment decision. It may mean they’re slightly worse off financially now, but provide much larger gains for the future.
Encourage them to understand projections: When you look at the projected income from a pension it often has little meaning. Just a glance at the value a pension is expected to be worth at retirement doesn’t demonstrate the level of income it will provide or how long it could last for. As a result, delving deeper is crucial for understanding if they’re on track to meet retirement goals. Realising they could fall short of their desired lifestyle may give workers the push needed to start increasing contributions.
Look at other ways to fund retirement: While pensions are a tax-efficient way to save for retirement, it can be complemented by other savings or investments. If your loved ones are worried about increasing pension contributions as they’ll be locked away until they approach retirement age, exploring alternatives may be the answer. Putting money into an ISA (Individual Savings Account) or creating an investment portfolio with a retirement goal could provide more flexibility and reassurance.
Suggest where to seek professional support: Working with a financial adviser can help put decisions related to a pension into perspective, as well as highlighting how to make the most of income and wealth. However, younger generations may believe they don’t need professional support yet. Providing them with insights into how and why you use a financial adviser, along with recommendations, can improve their financial security over the short, medium and long term.
To discuss how your pension is on track to provide the retirement you want or to connect us with the next generation of your family planning for their later years, please contact us.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by interest rates at the time you take your benefits. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace Pensions are regulated by The Pension Regulator.