Recent pension contribution rises may still not be enough for comfortable retirement.
The latest round of pre-planned increases to minimum contribution rates under automatic enrolment (AE) workplace pensions came into effect in April. If you are one of the 10 million people who have been automatically enrolled, then provided your yearly earnings are at least £10,000:
- Your employer must now contribute a minimum of 3% of your ‘band earnings’ into a pension (band earnings in 2019/20 are between £6,136 and £50,000); and
- You must make up the balance to bring the total contribution to 8% of ‘band earnings’.
The 8% total contribution figure is widely quoted, but the fact that it does not apply to all earnings is often overlooked. For example, based on the Office for National Statistics’ latest (February) estimate of average pay of £528 a week (£27,508 per year), the true AE contribution is approximately 6.2% of total pay.
AE contributions of 8% only provide around half the level of savings needed most people to enjoy an adequate retirement.
In the foreword to a 2017 Department for Work and Pensions report on the future of AE pensions, the then Secretary of State for Work and Pensions said, “…contributions of 8 per cent are unlikely to give all individuals the retirement to which they aspire”. His proposals included:
- Removing the lower limit on ‘band earnings’, so that the 8% was based on full earnings (up to £50,000);
- Reducing the minimum age for inclusion in AE from 22 to 18; and
- Encouraging savings above the 8% level.
Eighteen months (and two new Secretaries of State) later there have been no further developments. AE contribution increases in both April 2018 and April 2019 may well have encouraged the government to pause, if only to see the reactions of employees.
How much to contribute?
As far back as 2005, the Pensions Commission acknowledged that the state pension with additional AE contributions of 8% would only provide around half the level of savings needed for most people to enjoy an adequate retirement. The implication is that contributions should more than double for the average employee. But how much should your contribution levels increase? The amount will depend on several factors including:
- When you plan to retire and whether that is before you reach your state pension age;
- Your existing level of pension savings, including state benefits.
The calculation can become complex very quickly, so why not ask us to carry out an assessment of what your personal contribution rate should be?
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