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‘Cost of delay' means people have to over-compensate with higher contributions later
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Menace of inflation - Under 30's disadvantaging themselves by shrinking contributions in real terms
Using contribution figures from its quarterly Workplace Savings Index, Friends Life projects that their members who delay starting to contribute to their pensions by just ten years will miss out on considerable retirement income later on.
A 22 year old man, the age at which auto-enrolment kicks in, today who invests £162 a month (with annual contribution rise of 2.5%) until age 65 will have a projected pension pot of over £604,166 at retirement with compound growth assuming a growth rate of 7% a year and annual scheme management charges of 0.5%; a man who begins at 32 and also contributes £162 a month (with annual contribution rise of 2.5%) would only have a projected fund of just over £286,799 assuming the same growth rate. To put this into the context of income at retirement the 22 year old would get a projected £34,411 a year at retirement, the 32 year old would get less than half, just over an anticipated £16,451 a year1
The index found that members under 30 are falling behind other age groups in terms of contributions and on average have failed to match contributions to inflation since Q1 2009. When the urgency of saving becomes apparent later in life people have to over-compensate for the lower contributions made earlier in life. The cost of this delay is considerable:
A man who starts his pension at 32 would have to put in more than double the monthly contributions (£338.85 per month with annual contribution rise of 2.5%) to get the same annuity income (projected £34,411 a year) as a man who starts at 22 (£162 per month with annual contribution rise of 2.5%) - this would cost the 32 year old a projected £58,000 in additional contributions.1
The index reveals that ‘double defaulters' - those who join a company pension scheme but make no active selection on their fund choice, nor on the contribution rate they pay - are faring badly in the current environment. Despite the index showing that overall contributions now stand at £283 a month on average, inflation is eroding not just the value of investments over time but also the value of contributions. Over quarter two 2012 inflation increased whilst average contributions decreased by 0.5% , meaning inflation is now rising at a faster pace and causing the future purchasing power of contributions to lessen. Double defaulters in particular are unwittingly saving less in real terms for their retirement as inflation erodes the value of both their monthly contribution and investment.
Martin Palmer, Head of Corporate Marketing Benefits at Friends Life said:
"In the year that auto-enrolment goes live for the largest companies in a bid to reverse the savings deficit of our ageing population, the reality is that contribution increases, most likely the result of salary increases, aren't big enough. Failing to beat inflation, the value of the monthly contribution as well as the value of a member's investment over time is being eroded.
"To reverse this decline auto-enrolment will need to do more than rely on inertia to encourage people away from ‘double-defaulting' and to proactively take charge of their contribution levels."
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