Half of young people to drop out of auto-enrolment in 2018
Despite the success of auto-enrolment, 70% of 22-29-year-olds are not putting away enough to reach their desired income of £23,000 a year for a comfortable retirement.
According to the 13th annual Scottish Widows Retirement Report, the average contributions are £184 a month (including employer contributions), meaning they can expect an annual pension of just £15,200, including the State Pension.
A 30-year-old contributing the current minimum of 1% to their workplace pension (matched by their employer) will achieve an income in retirement of £9,734. And even when the minimum contributions rise to 8% (employee and employer combined) in 2019, they will only achieve an annual retirement income of £14,047. This is a shortfall of almost £9,000 on expectations.
Scottish Widows found that as the contribution rates rise from April 2018, 48% of young people will stay committed to auto-enrolment.
Half of those in their 20s (53%) said they can’t afford to save for the long-term because of competing financial priorities. Those in their 20s are saddled with twice as much debt as other age groups, on average owing more than £20,000.
Almost four in 10 have student loans eating into their monthly pay cheques and one in five have unpaid credit card bills, while 15% have other loans to pay off.
For those delaying contributions into a workplace pension, the savings needed for a comfortable retirement are much steeper. If someone starts saving into a pension at the age of 25, they would need to put aside £293 each month to reach a £23,000 annual income.
Delaying until the age of 35 means monthly savings would need to jump to £443. At 45, this would be £724. For someone who left retirement saving to their 50s, they would need to put away £1,445 a month to enjoy a £23,000 annual pension.
Overall, Scottish Widows suggests a combined 12% employer and employee contribution as an adequate level of saving.
‘Auto-enrolment may well be lulling people into a false sense of security’
Catherine Stewart, retirement expert at Scottish Widows, said: “There is no doubt auto-enrolment has been a success in kick-starting the savings habit for millions – but it is not a silver bullet. Auto-enrolment may well be lulling people into a false sense of security that they are putting away enough for a comfortable retirement. For many, that is simply not the case, particularly given retirement is looking more expensive than ever. With one in every 12 private rental sector tenants now a pensioner, ‘Generation Rent’ is headed for a more expensive retirement than previous generations.
“While retirement may feel like a long time away for those in their 20s, it’s really important they start to think about it as soon as possible. Using the right platforms, technology and content to engage young people in formats they appreciate is a critical first step. If we don’t get this right then it is far more difficult for them to reach their desired savings levels in their 30s and 40s.”