Pensions: why auto-enrolment isn't enough

If you've been auto-enrolled into a workplace pension and you're putting money away for your old age then you deserve a pat on the back. But the bad news is what you save won't be enough.

In 2012 the government initiated auto-enrolment as a way to get the nation to save for retirement and avoid pensioner poverty. It was a noble, and much needed, nudge in the right direction but if people think they are doing enough just by choosing to stay in the scheme, they are going to be very disappointed.

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Even when the contribution rates rise to 8% in 2017 (made up of 4% employee contribution, 3% employer contribution and 1% tax relief), it will still leave a gaping hold in people's pensions, according to figures from the Pension Policy Institute (PPI).

The PPI takes the example of a person saving from age 22 (the youngest age at which you can be auto-enrolled) and earning an average wage of £27,000 a year, saving the required 8%.

To have a 'comfortable' retirement income (based on two-thirds of working life wages) the person will need to save enough to generate £18,000 a year in retirement.

The state pension does some of the work – it will be at least £7,865 a year by the time our person retires at age 68 but their pension pot will be just £56,000. Based on an average annuity price, the pot would only pay out £3,200 a year.

If we add £7,865 and £3,200 that still leaves a shortfall of around £7,000.

Not enough

This is a worrying scenario; even those who do everything right as per the government's instruction will not achieve a comfortable retirement. How are we supposed to make pensions attractive if people do the right thing, reach retirement and still find themselves struggling?

The fact is auto-enrolment is just a base and individuals need to save more on top of this base. But they won't. The fact we have auto-enrolment in the first place is testament that people won't save unless they are nudged into it.

What really needs to happen is the 8% contribution rate needs to rise – a lot. Experts agree it needs to be at least 15% in order for people to make serious inroads into saving.

In the meantime, individuals need to engage with their pensions, think about what their future will look like, and squeeze a few more pounds from their pensions to fund their old age.

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