New pensions rules risk leaving us in poverty

older people with beach hutsSCOTT HEPPELL/AP/Press Association Images

The government says it has the solution to the pensions crisis: auto-enrolment. It sounds foolproof, and hopes are high as we reach the launch of the scheme.

However, one expert is warning that there's a very real risk it will leave millions in dire financial straits in retirement.

A good scheme

Auto-enrolment sounds like a very sensible solution. At the moment many employers don't offer a pension, and even when they do, many of us don't get around to joining it.

In future, your employer will be forced to offer access to a scheme, and you and your employer will automatically make contributions - unless you specifically choose to opt out.

It should bring an end to the horrors of millions of people entering retirement with no pension of their own.

However, the experts warn that this is not enough to keep us out of financial difficulties in retirement.

Not enough

Jon Dixon, Corporate Advice Manager with advisers AWD Chase de Vere, says: "People mustn't fall into the trap of thinking Auto Enrolment alone will provide them with a comfortable standard of living in retirement; it simply won't. Specified contributions levels are such that those nearing retirement won't have time to build up a significant pension fund where as those with a longer time span still face the prospect of muted investment returns, inflation eating into the spending power of their money and depressed annuity rates."

He has put together figures which show that someone age 60 now will receive a monthly income of just £9.62 from their auto-enrolled pension. Those aged 50 will save up enough for £73 a month. Even 40-year-olds cannot hope for more than £163.87 a month, and 30-year-olds £292.08 a month. Those just starting out - at 20 - can still only expect to build up £470.91 a month through the scheme.

This will sit alongside state provision. However, the future of any state support is far from guaranteed, so clearly these sums are paltry compared to the amount people will need in retirement.

What you should do
Dixon says this is not a reason to opt out, and says that for the vast majority of people, opting in is the best approach. However, he adds: "While Auto Enrolment could provide a great foundation for people's retirement planning, it is unlikely to give them the standard of living they would want in retirement. Individuals should therefore do more than simply contribute the minimum amounts into an Auto Enrolment pension. To help generate enough income in retirement they must also look to make additional pension contributions and to invest regularly in cash and/or stocks and shares ISAs."

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