Raising AE contributions could boost pots by £217,000, says SL
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Standard Life says increasing minimum contributions to 12% from the current 8% could improve a long-term saver’s retirement outcome by as much as £217,000.
The provider’s analysis comes ahead of a pensions review by the government, which has announced that the second phase of this would include adequacy considerations. Pensions and insurance associations have long called for higher minimum contribution rates, usually citing 12% split evenly between worker and employer, arguing that the current total of 8% is too little to provide a decent retirement income for most people.
Standard Life suggests for someone who began working full-time with a salary of £25,000 a year from the age of 22, raising contributions from 8% to 12% would mean they could accumulate as much as £651,000 by the age of 66, not adjusted for inflation. This would represent a 50% uplift on the £434,000 they might get if they paid in the current minimum of 5% plus 3% from the employer. The modelling assumes 5% a year investment growth with a 1% annual management charge, and pay rises of 3.50% a year.
Those whose savings journey began later in life could see an even greater relative benefit of higher minimum contributions, the provider says.
“As we approach auto-enrolment’s 12th anniversary, it’s important to celebrate the achievements of the scheme while acknowledging that we need to do more to help people secure a decent standard of living in retirement,” said Gail Izat, managing director for workplace pensions at Standard Life.
Standard Life suggests for someone who began working full-time with a salary of £25,000 a year from the age of 22, raising contributions from 8% to 12% would mean they could accumulate as much as £651,000 by the age of 66, not adjusted for inflation. This would represent a 50% uplift on the £434,000 they might get if they paid in the current minimum of 5% plus 3% from the employer. The modelling assumes 5% a year investment growth with a 1% annual management charge, and pay rises of 3.50% a year.
Those whose savings journey began later in life could see an even greater relative benefit of higher minimum contributions, the provider says.
“As we approach auto-enrolment’s 12th anniversary, it’s important to celebrate the achievements of the scheme while acknowledging that we need to do more to help people secure a decent standard of living in retirement,” said Gail Izat, managing director for workplace pensions at Standard Life.
Higher contributions would result in greater financial wellbeing, benefitting both employees and businesses in the long term, she argued.
“In other countries like Australia, where minimum contributions are set to reach 12% from next July, higher contributions have led to greater savings adequacy and a higher anticipated standard of living in retirement than the UK,” she said.
Patrick Thomson, head of research analysis and policy at longevity thinktank Phoenix Insights – of Standard Life’s owners Phoenix Group – said a plan to increase minimum contributions was crucial to addressing widespread undersaving, warning of people being given a false sense of security with current minimum levels.
“We hope the government’s review of pension adequacy will pave the way for an increase to minimum contributions when the economic conditions are right,” he added.
Recent governments were unconvinced that the economic conditions were right. They have been slow to reform auto-enrolment, introduced in 2012. A law giving the secretary of state powers to extend auto-enrolment to under-22s and scrap the lower limit on qualifying earnings was passed a year ago, but a consultation on implementing the changes has not been issued yet. The reforms go back to a 2017 review.
Patrick Thomson, head of research analysis and policy at longevity thinktank Phoenix Insights – of Standard Life’s owners Phoenix Group – said a plan to increase minimum contributions was crucial to addressing widespread undersaving, warning of people being given a false sense of security with current minimum levels.
“We hope the government’s review of pension adequacy will pave the way for an increase to minimum contributions when the economic conditions are right,” he added.
Recent governments were unconvinced that the economic conditions were right. They have been slow to reform auto-enrolment, introduced in 2012. A law giving the secretary of state powers to extend auto-enrolment to under-22s and scrap the lower limit on qualifying earnings was passed a year ago, but a consultation on implementing the changes has not been issued yet. The reforms go back to a 2017 review.
What is stopping governments from increasing minimum contributions?
