Are you saving enough for retirement?

Author: Huw Jones
Published: 21st August 2019

Are you saving enough to live the life you want in retirement? It’s an important question, especially for younger people who face the prospect of waiting longer to receive a state pension income.

Automatic enrolment into a workplace pension was introduced to encourage more people to make their own provision for an income in retirement. Early indications suggest this government policy could be viewed as successful, with more people now saving sufficient amounts for later life.

According to a new report by insurer Scottish Widows, the number of under 30’s saving enough for retirement has risen by 9% in the past year.

The finding was contained within the 14th annual Scottish Widows Retirement Report. They found that two in five workers (39%) aged 22-29 years old are now saving adequately for an income in retirement. This is up from just 30% last year and has been attributed to the success of auto enrolment.

However – and this is the less good news – the research also found that more than one in five young people (21%) are still saving nothing towards their retirement. A further 20% are saving less than 12% of their income. 12% is the figure Scottish Widows are suggesting is the minimum amount needed to build an adequate pension pot for later life.

The research also found that nearly two million so-called ‘multi jobbers’ are missing out on employer pension contributions because of a quirk in the system around automatic enrolment thresholds.

Multi jobbers are people with more than one job and they could be missing out on as much as £90 million in employer pension contributions. This is happening because their earnings from each employer are being assessed against automatic enrolment threshold, rather than their total earnings across all employment.

The projections from Scottish Widows, which are based on the latest figures from the Office for National Statistics, show that more than 1.8 million multi jobbers have at least one employment earning less than £10,000 a year, and they are not enrolled in the company pension scheme due to being under the earnings threshold.

If the auto-enrolment threshold was scrapped, it could result in a further £90 million of employer pension contributions being paid.  Robert Cochran, Retirement Expert at Scottish Widows, said:

“It’s encouraging that more young people are saving enough for a decent retirement and auto-enrolment has played a really important part. However, auto-enrolment was designed as a safety net for a country facing a pensions crisis.

“This year’s study shows some of the hardest working and most financially vulnerable members of society are slipping through the auto-enrolment net because of minimum earnings thresholds. This unfairly impacts multi-jobbers, who could be working the equivalent of full-time hours, yet without the financial benefit of having a single employer.”

The figures in this report might represent good news for younger pension savers, with the exception of those multi jobbers who are missing out, but it also found a stagnating level of pension savings levels for the rest of the working population.

Only 55% of UK workers are now saving adequately for retirement, when viewed across all age groups, falling slightly from 56% last year. It’s the first time in five years that the prevailing rate has fallen, which hopefully isn’t the start of a longer-term trend.

The slight decline in adequate levels of retirement savings comes despite an increase in the minimum contribution levels for automatic enrolment.

Scottish Widows have made a number of recommendations designed to get people saving an adequate level for their retirement.

They want to make pensions more inclusive for lower earners.

As things stand, automatic enrolment only applies to those earning more than £10,000 a year. It’s possible to opt-in to a workplace pension when you’re earning £6,032 a year or more, but many earning this level are choosing not to save for their retirement.

As a result, lower earners are missing out on valuable pension contributions from their employers, as well as multi jobbers missing out, as described earlier.

Scottish Widows says that the current threshold puts an unfair barrier in the way of lower paid workers and their ability to prepare adequately for retirement. They are calling for the threshold to be scrapped entirely, letting all workers benefit from employer pension contributions.

Another recommendation from Scottish Widows is to lower the minimum age applicable to automatic enrolment.

The research shows that more younger people are saving adequately for retirement, but compared to the national average, younger savers are still missing out.

They want to see the minimum age for automatic enrolment lowered to 18, which is in line with government proposals. The earlier people start saving for retirement, the more they can save during their working lifetime.

Another proposal is to continue auto-escalation beyond 8%.

The minimum total pension contribution for auto-enrolment is rising to 8% next year, but will still result in people saving less than the 12% they recommend as being adequate. By continuing to auto-escalate the total minimum pension contribution beyond 8%, people will be encouraged to save more towards retirement.

A fourth recommendation from Scottish Widows is to digitise pensions, engaging better with younger people where online tools are second nature.

Part of this digitisation process is the introduction of the pension dashboard, offering savers a single, consolidated view of all of their pension savings in one place.

Finally, Scottish Widows are proposing to tackle the ‘one size fits all’ approach to encouraging saving. Instead, they want the government to recognise that age and how much someone earns are not the only factors in determining preparation for retirement.

There could be an opportunity in this respect for the new Public Financial Guidance Body, with its broader remit, to get the pension industry working together to achieve consistency and have a greater impact on our collective savings habits.

The question of whether you are saving enough for retirement is always going to be very personal. It’s interesting to look at broader trends and national averages, but for our clients the important situation to analyse is their own.

Do speak to us if you know someone who needs help determining whether they are saving enough towards their retirement and whether this money could be better invested to achieve their goals.