The Pensions Policy Institute has published "The benefits of automatic enrolment and workplace pensions for older workers", a report that analyses the returns on pension contributions for those aged between 50 and State Pension Age (SPA) who do not opt out from their workplace pension after being automatically enrolled.
The report has been funded by Prudential, and uses data from the English Longitudinal Study of Ageing (ELSA) to calculate internal rates of return from pension contributions under automatic enrolment, based on household circumstances, and taking into account the likely effects of means-tested benefits and tax in retirement.
The report finds that, under reasonable assumptions, the vast majority (over 95%) of older workers are likely to receive good value on their pension contributions from staying automatically enrolled. Recent research from the Department of Work and Pensions (DWP) found that opt out rates for those aged 50 and over, at 15%, had been higher so far than those for other age groups (at 9% on average).
Recent changes to the policy landscape, including the phased introduction of minimum contributions for automatic enrolment, and the introduction of the single-tier state pension in April 2016, are expected to have improved rates of return for older workers. However, for some groups it may still be sensible to opt out of pension saving, particularly if they have issues with affordability and debt.
Mel Duffield said “The analysis shows that, despite the higher opt out rates of around 15% seen amongst older workers, staying in a workplace pension is likely to deliver a very good return on their own pension contributions for the vast majority of this group.”
“Even so, the pension pots being built up by older workers under automatic enrolment, and particularly by lower earners, are expected to be relatively small. An average 51 year old, who is eligible to be automatically enrolled in 2012 and who only makes the minimum level of contributions, will have built up a pension pot of around £13,000 by the time they reach State Pension Age.”
The report also finds that a very small group (less than 3% of those aged 50-SPA and automatically enrolled) are likely to be at high risk of automatic enrolment not being suitable for them, assuming that they do not opt out. These are generally older workers who are automatically enrolled and who then become eligible for Guarantee Credit in retirement because of the low income of their partner. For those couples eligible for Guarantee Credit (currently set at £226.50 per week for couples), staying automatically enrolled and increasing their private pension income by £1 simply leads to a £1 reduction in benefit entitlement in later life, unless they can save enough in their workplace pension to lift them above the means-tested thresholds.
However, even for those groups with low rates of return, they will still be able to benefit from being able to take a 25% tax-free lump sum at retirement, and the remainder of their pension pot is likely to be small enough to be taken as a lump sum, even before the new flexibilities for savers with Defined Contribution (DC) pensions announced in the Budget 2014.
Mel Duffield added “The analysis finds that, under reasonable assumptions, around 90% of the pension pots built up under automatic-enrolment by older workers saving into a pension for the first time would have been below the existing trivial commutation limits. This would have given those savers the flexibility to take their pension as a lump sum at retirement and reduce interactions with means-tested benefits, boosting their rates of return on pension saving.”
“Following the announcement in the Budget 2014, from April 2015 all older workers should be able to use these flexibilities, irrespective of the size of their pension pot from automatic enrolment and any existing pension savings. Individuals will, however, require support and guidance to ensure that they can access their pension in a way that delivers a good return on saving while meeting their income needs at different stages during their retirement.”
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