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Savers are not increasing pension contributions after a pay rise

Written by: Rebecca Goodman
Putting money into a pension isn’t something the majority of people do when their disposable income rises, a new report has found.

If a worker gets a 10% pay rise, pays off their mortgage or their childcare costs go down, none of these are incentives to put more away into a pension, a new report has found.

Yet there are well-reported concerns that many people are not saving enough for their retirement.

In fact, one in five households are at risk of failing to even achieve a ‘minimum’ standard of living in retirement, while three quarters of Brits are stressed about their retirement plans.

Fewer than 1% of private sector employees actively increase their pension contributions in response to a 10% pay rise, according to the report from the Institute for Fiscal Studies (IFS).

While many people may not be able to afford to put away more money, given the cost-of-living crisis, the report suggests that even those who have the money to do so, aren’t choosing to put it into a pension pot.

Older employees, aged between 50 and 59, for example are not putting away more money, despite this group usually having fewer outgoings such as a mortgage or childcare fees.

There is little evidence that people put away more money into a pension when they pay off their mortgage.

In fact, the average increase to contributions from someone who is mortgage-free is similar to those who are still paying off a mortgage.

While some parents lower their contributions when they have a first child, due to a rise in other spending such as childcare costs, there’s also no proof that parents increase contributions when their children are older.

Higher default contribution rates could boost pension pots

One option proposed by the IFS is higher default contribution rates, especially for employees who pay a higher-rate of tax.

Higher-rate taxpayers save 40p of income tax for every £1 they put away compared with 20p for basic-rate taxpayers. But there is also no evidence that people put more money away to a pension when they become higher-rate taxpayers.

Laurence O’Brien, a research economist at the IFS, said: “Given concerns that many private sector employees are at risk of undersaving for retirement, a natural question is whether changes to public policy could help them increase their pension saving when it makes more financial sense to do so.

“For example, higher default employee pension contribution rates at higher levels of earnings, particularly above the higher-rate threshold, or at older ages could help many make better saving decisions.”

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