October marks the 10-year anniversary of auto-enrolment being introduced in the UK, designed to improve pension saving and put people on track for a better retirement. More than 10 million people have been auto enrolled since its introduction; participation in workplace pensions has increased from 55% in 2012 to 88% in 2021. In that respect, it has successfully widened the savings base and helped combat inertia around long-term saving.
However, a massive 46% of UK consumers are still not confident that they’ll have enough for a comfortable retirement, according to new research from Barnett Waddingham. This rises to 51% is women, 53% of 35–54-year-olds, and 68% of those with no pension other than the state pension.
This lack of confidence is not unfounded. Auto-enrolment has led to most people not saving the amount they need to, and others slipping through the gaps altogether.
Under-saving under auto-enrolment
The research reveals that 32% of UK adults have a defined contribution (DC) pension. This rises to 37% of the eligible age population for auto-enrolment (22-65 years old), and 46% of full-time workers. More than two thirds (70%) of those with a DC pension are currently paying into that pension, while 28% are not – 2% aren’t sure.
Of everyone else, 31% have a defined benefit (DB) pension, 17% have a private/ SIPP pension, 8% have a pension but aren’t sure which type, and 11% aren’t sure whether they have a pension at all.
For those on DC pension, the recommended total contribution is 12% of salary each year; that includes employee and employer contributions. The minimum legal contribution is 8%, including 3% from the employer. Concerningly, more than a quarter of savers (28.1%) were contributing less than 3% in 2021, according to the ONS.
Those excluded from auto-enrolment
According to Barnett Waddingham’s research, one in five (20%) Brits don’t have any private or workplace pensions – they will only receive a state pension. This rises to 26% of women, compared to 13% of men. Auto-enrolment’s strict banding means that lots of people fall through the gaps altogether.
13% of working Brits are excluded from auto-enrolment altogether due to their income structure – 10% have one job which earns less than £6,240 a year (below the lower level of qualifying earnings - LEL), while 4% have multiple jobs all of which earn less than £6,240 a year. This is led by those in part time work (30%) but is still true of almost one in ten full time workers (9%). It rises to 18% of those aged 55+ (and still working).
Those earning below the £10,000 auto-trigger, but above the LEL (£6,240) can opt-in to a workplace pension and receive the mandatory employer contribution. 14% of people are in this position. This is more true for men than women (15% vs 12%), and is truest for those aged 18-24, at 19% - 15% have one job earning £520-833 a month, while 3% have multiple jobs with at least one in that earnings category.
Of those eligible to be opted-in based on age (22 to 65), 20% aren’t paying into their DC pension at all. Of those entitled based on income – that is, in at least one job earning £10k a year – 11% have a DC pension which they’re not paying into.
70% of people who can opt in say they have done so, while 29% have not. That’s almost a third of people missing out on available employer contributions and tax relief.
Mark Futcher, Partner & Head of DC at Barnett Waddingham, comments: “Auto-enrolment was designed to get more people saving for retirement. At the simplest level that has worked, but the policy has by no means been a roaring success. There are two core problems: not enough people saving, and people not saving enough.
“The auto-enrolment legislation excludes a huge number of low earners, including almost one in ten full-time workers. The Government has opted to keep the minimum earnings band at £10,000 a year, despite multiple calls to scrap it. The new Minister for Pensions must rethink this; if they don’t, it falls to employers to consider increasing remuneration to their staff to account for the lack of long-term savings.
“Separately, of the 20 million people saving into a workplace pension, the vast majority aren’t saving enough.
Savings rates have plateaued at the minimum contribution level. The Government had a ripe opportunity to include a 1% employee contribution hike every two or three years, which would have moved many people towards the recommended 12% saving rate. Instead, they failed to capitalise on the success; as the cost-of-living crisis worsens, it’s arguable they’ve missed their chance.”
Mark offers his top tips to employees worried about their pension:
1. Check your getting the most you can from your employer
As a first step, check you’re contributing enough to get the maximum matched contribution from your employer – and if it’s within your budget, try to increase your contribution by a percent or two. If you can save 1% of your salary, better to save it somewhere it’s matched than somewhere it isn’t.
2. Be realistic about your retirement plan
The provider of your workplace pension will adjust your fund based on when you told them you’re going to retire. People are retiring later nowadays – if you told them 65 but it’s likely to be 67, update them. Not only does this mean you’ll get two years of extra saving, but you’ll also benefit from two years not drawing down; it’s a four year benefit and added peace of mind.
3. Talk to your employer
Good employers will have a vested interest in your financial wellbeing. If the cost-of-living crisis is biting and you need to pause contributions, talk to them about whether they’re willing to keep up their contributions for three months. Similarly, if you’re going on parental leave, ask them about what happens to your contributions while you’re off.
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