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Auto-enrolment warning: why contributing the minimum isn’t enough

Joanna Faith
Written By:
Joanna Faith

If you think being auto-enrolled into your workplace pension will be enough to see you through retirement, think again.

A new study by Royal London has found Brits who want a good income in retirement and who contribute the minimum auto-enrolled pension contribution of 8% will have to work late into their seventies.

Under the auto-enrolment scheme, workers who don’t already have pension arrangements are automatically signed up into a workplace pension to help them save for their retirement.

By April 2019, the total minimum contribution will rise to 8% – that includes at least 3% from the employer, up to 4% from the employee and 1% tax relief from the government.

According to the study, someone on average earnings who’s looking to achieve a pension of two thirds of their pre-retirement income with inflation protection and provision for a surviving spouse, would need to work to 77 if they only contributed the statutory minimum. Someone requiring half of their pre-retirement income would need to work to just over 71.

Both cases are based on someone starting to save at age 22 and continuing to contribute each and every year until they retire.

The report also looked at what would happen to someone who doesn’t start contributing at the statutory minimum level until later in life.

It found people who started saving at 35 need to work to 79 for a pension of two thirds of their pre-retirement income, while someone who didn’t start saving until 45 would have to work into their eighties to make up the shortfall.

The report also looked at the position of people on higher incomes, such as those on double the national average income.

For these people, the goal of 67% of pre-retirement income is effectively unattainable if they contribute only at the statutory minimum level.

To achieve two thirds of your pre-retirement income, they’d have to save around 20% of their gross pay throughout their working life.

Steve Webb, Royal London director of policy, said:  “Getting millions more people saving through automatic enrolment is a huge step forward, but many face a cruel disappointment if they think that current minimum contribution levels will deliver them the sort of retirement they are looking for.  Without significant increases in contributions, we could be witnessing the death of retirement.

“This report shows that today’s workers are unlikely to be able to secure the quality of pension provision enjoyed by many in previous generations without either working well beyond pension age or contributing substantially more.  Even those who save systematically from the start of their working life could face working into their late seventies if they want to replicate the best pensions of those retiring today.”