'Put pay rises into pension' plea

Workers should consider ploughing their pay rises into their pension savings as the Government estimates that nearly 12 million people are still not putting enough money aside for their old age, Pensions Minister Steve Webb has said.

Around 11.9 million people are still failing to save enough to live comfortably in their retirement, according to new projections from the Department for Work and Pensions (DWP), which has taken savings into both private and state pensions into account to make its calculations.

Writing in the Daily Telegraph, Mr Webb said people must take "personal responsibility" and think about what they can do to achieve the amounts they aspire to live on in their later years.

The DWP's figures suggest it is middle and higher income earners who will face the biggest income shock when they end their working lives.

Around 4.2 million under-savers, equating to 35% of all those who are not saving enough to maintain the standard of living they have become used to during their working lives, have incomes between £22,700 and £32,500, while a further 4.6 million under-savers, making up 38% of the total, are in the £32,500 to £52,000 income bracket.

Around 1% of pension under-savers have an income of less than £12,300, 16% earn £12,300 to £22,700 and 10%, or 1.1 million people, have a salary of over £52,000, according to the DWP's modelling.

Mr Webb suggested in the Daily Telegraph that people should think about putting any salary increases they get towards their pension savings.

He wrote: "In most years, people who are in work will receive a pay rise - even if that's only a small amount of money, it might be that this could fund a little extra towards the workplace or private pension that's going to fund a happier and more comfortable retirement.

"Above all, it's time we all started thinking about not just whether we pay into a pension but how much we contribute and what kind of an income it will fund in due course."

The DWP's modelling suggests that around half of people who are not saving enough towards their retirement are "mild under-savers", meaning that that are at least 80% of the way towards achieving the amounts they need for a comfortable retirement.

Around one in 12 (8%) people who are not putting enough aside are "substantial" under-savers, meaning they are putting away less than half the money they need.

Mr Webb also said that "difficult decisions" will need to be made as the Government's landmark scheme to automatically enrol people into pensions continues on where to set the appropriate level for how much money should be contributed into schemes.

He said that potentially raising pension contribution levels could reduce the number of people under-saving - but it could also have an impact on people opting out of their pension. Opt-out rates are currently low.

The minimum contribution that must be paid into a worker's pension pot, which is a percentage of an individual's earnings and is set by Government, is already set to increase in phases in the coming years. This minimum is made up of the worker's contribution, the employer's contribution and tax relief.

At present, auto-enrolled workers must contribute 0.8% of their qualifying earnings, increasing to 4% from 2018. Employers contribute 1% of qualifying earnings, increasing to 3% from 2018 and the Government contributes 0.2% of qualifying earnings in tax relief, rising to 1% from 2018.

Mr Webb posed the question: "Do we look to take another big slice off the number of under-savers by encouraging workers and employers to pay more into their schemes and, if so, how do we balance this with the short-term impact on people's take home pay or the effect it might have on opt-outs?

"It's a question we need to answer sooner rather than later. But while the Government can do a lot, it can't absolve people of all personal responsibility - and I make no apology for saying that it is incumbent on people to think about their own prospects too.

"Everyone's aspirations are different. Only an individual or couple can decide the sort of income they need, hope or expect to live on in retirement.

"But it's a consideration everyone should make - and then look at what they can do to make it happen."

Nearly four million people have been signed up to workplace pensions so far as a result of automatic enrolment. The initiative has been seen as a success, with a much higher than expected rate of around nine in 10 workers remaining in their scheme once they have joined.

Auto-enrolment is part of the Government's wider retirement savings revolution, involving a raft of reforms with the over-arching aim of increasing people's confidence that they will be saving into pension schemes which offer good value and that when they come to retire they will have freedom over how they cash in their savings pot.