Increasing workplace pension contributions for both employees and employers could significantly enhance retirement savings, potentially adding £217,000 to an individual's pension pot, according to new research.
Raising Pension Contributions Could Significantly Increase Retirement Savings
According to Standard Life analysis, increasing contribution levels may significantly raise a typical retirement fund to £651,000 in today’s terms when the workers reach retirement age. This comes in light with the latest effort by the UK Government giving a Pensions Review which, among other things, looks at the state of the country’s long term savings and investments and seeks to “boosting growth and making every part of Britain better off.”
Currently, the employee and employer-share for the minimum auto-enrolment contribution is made up of 5% and 3% respectively, making it a total of 8%. With the findings of Standard life, they recommend that if these contributions were raised to include 12% with par contributions from both parties of 6% each, there would be additional value benefits from retirement savings. For example, a person who is 22 years of age and earns £25000 each year will be able to enhance his retirement savings from £434,000 under the current structured scheme to £651,000 after the increase.
Gail Izat, Managing Director for Workplace Pensions at Standard Life, commended the Government's focus on savings adequacy in the ongoing Pensions Review. She emphasized the importance of building on the success of auto-enrolment, which is nearing its 12th anniversary, by increasing contribution rates to ensure a more secure retirement for workers. Izat highlighted that other countries, like Australia, have seen improved retirement outcomes with higher mandatory contribution rates.
Addressing the Pension Savings Gap
There are concerns about around 17 million UK adults are unable to save enough now to achieve the necessary income at retirement, and this factor necessitates increased contribution. Though auto-enrolment has played a key role in improving pension coverage among the UK population, it is feared that the existing contribution levels may not be sufficient to fulfil the retirement income ought to be.
In particular, Patrick Thomson, Head of Research Analysis and Policy of Phoenix Insights, said that there are major problems with underestimating the necessity to save into a pension by people. He also said that the more likely issue that works with people in the future contributing to the level of the current statutory contribution rate, thinking that it meets their retirement requirements.
Thomson maintained that it is the hope of the Government’s review that it will result in higher minimum contributions when the economic circumstances permit it.
Consultant Mercer also supports the advancement of auto enrolment, for instance minimum contribution rate should be increased to 12% and enrolment age should be lowered to 18 rather than 22. They further suggest including gig economy workers, as well as finding a solution to the pre-retirement female gap concern.
In addition, Mercer also called for the merging of several individuals defined contribution plans as well as an enhancement of regulation surrounding the master trust market as a means to achieve better investment performance at retirement.