Should We Save 12% Of Salary Towards A Pension?

Workers should save at least 12 per cent of their salary towards a pension and employers should stump up half of that, according to a 10-year plan from a top industry body.

The current auto-enrolment minimum is 8 per cent of salary – with individuals contributing the biggest share – but some finance experts warn that falls short of what is needed for a comfortable retirement.

A new 12 per cent minimum should be phased in between 2025 and 2032, and the split should see employers put in 6 per cent, while workers and tax relief from the Government make up the rest, says the Association of British Insurers.

Under auto enrolment, employers are required to put a minimum of 3 per cent of earnings between £6,240 and £50,270 into staff pensions. Tax relief from the Government provides another 1 per cent.

Workers must put in at least 4 per cent on their own behalf, and if they opt out all the above is lost.

To avoid an ‘all or nothing’ situation which might prompt some workers to opt out of pension savings, the ABI suggests two ways to soften the impact of increased contributions on people’s take home pay.

‘One option is to raise the total rate to 12 per cent with the built-in flexibility to opt-down if this rate is unaffordable for people, allowing more savers to stay automatically enrolled,’ says the industry body

‘Another option is to increase the rate to 10 per cent with an increased incentive to opt-up to 12 per cent on a matching basis with employers.’

The ABI suggests the Government and finance industry should conduct behavioural research to determine which approach is most likely to be affordable and deter people from opting out of pension saving completely.

The present auto enrolment minimum savings rate has been in place since April 2019, and there no further increase is currently timetabled.

Under the ABI’s plan, for basic rate taxpayers the contribution breakdown would change to 4.8 per cent from individuals, 1.2 per cent in tax relief and 6 per cent from employers by 2032.

Some experts have recommended a more ambitious pension savings target in the past, with one influential report suggesting the goal should be encouraging people to put aside 15 per cent of salary to build a pot for retirement.

The ABI hailed the success of the first decade of auto enrolment, which saw the Government force all employers to set up pension schemes for their workers and help contribute to them, and led to 10million more people starting to save for old age.

It urged the Government to bring forward two further changes which it has already promised but not scheduled for action yet – lowering the age threshold for auto enrolment from 22 to 18, and reducing the earnings threshold from £10,000 so that contributions are made from the first pound earned.

The ABI has also suggested the Governement investigate giving people early access to their pension pots in cases of significant financial hardship. 

But it warned against introducing automatic pension contribution increases when people get pay rises.

Proposals would see employer contributions rise from 3% to 6% by 2032 

‘The huge success of automatic enrolment reflects a long-term plan based on consensus between political parties, industry and employers,’ says Dr Yvonne Braun, director of policy for long term savings and protection at the ABI, which is bankrolled by pension firms and insurers.

‘We need the same approach now to determine the future of the policy, ensuring more people are included and are saving enough, with the right level of flexibility.’

A government spokesperson says: ‘Automatic enrolment has succeeded in transforming pension saving, with more than 10.6million workers enrolled into a workplace pension to date and an additional £28billion saved in 2020 compared to 2012.

‘The Government’s ambition for the future of automatic enrolment will enable people to save more and to start saving earlier by abolishing the lower earnings limit for contributions and reducing the age for being automatically enrolled to 18 in the mid-2020s, benefiting younger people, low-paid and part-time workers as they will receive contributions from their employer from the first pound earned.

‘We want to make sure that these changes are made in a way and at a time that is affordable, balancing the needs of savers, employers and taxpayers.’

Tom Selby, head of retirement policy at AJ Bell, says of the ABI proposals: ‘Setting in train a plan to gradually raise minimum contribution rates and ensuring a fair balance between employers and employees is a sensible approach.

‘Baking flexibility into the increases so employees aren’t left with an “all or nothing” choice between retirement saving or not in the workplace should help reduce the risk of opt-outs spiking.

‘Before that happens, the Government needs to implement the recommendations of the 2017 auto-enrolment review, including removing “qualifying earnings” bands so every pound earned qualifies for a matched contribution and reducing the minimum age from 22 to 18.

‘Clearly this is hugely challenging against a backdrop of spiralling living costs, but every year of delay will exacerbate the risk of a future retirement crisis.’

Selby also called for action to help self-employed people save for retirement.

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, says: ‘Boosting savings levels is a tricky balancing act.

‘We need people to save more for tomorrow but not at the cost of harming them today and the pandemic and ongoing cost of living crisis has had a significant impact on the population’s financial resilience.’

She points out that in Australia employers contribute 10 per cent of workers’ salaries to their pensions, much higher than the current 3 per cent in the UK.

‘An initial increase in their contribution to 5 per cent from 2028 would do much to boost people’s retirement incomes – keeping them contributing to a pension without putting further pressure on their daily finances.

‘A further increase in both employer and employee contributions to 6 per cent each from 2031 would see people saving significantly more without having to make a huge financial sacrifice – the ability to opt up or down would mean people were not under pressure to make contributions they couldn’t afford.’

Michael Ambery, partner at Hymans Robertson, says: ‘Auto enrolment has been an undoubted success and the increase of those contributing to a workplace pensions scheme is testament to that.

‘But work needs to be done to increase participation further, especially in those ages that fall below the eligibility criteria and for those, especially women, in part time jobs where participation levels are much lower.’

He adds: ‘There is a danger that auto enrolment could be creating a false sense of security for people that they will have an adequate income in retirement, when the levels they are contributing may not be enough.

‘While it is still vital to encourage everyone to contribute at the current level of contribution of 8 per cent, it could still be below the level required to achieve an adequate pension.

‘Our analysis shows that well over half are not saving adequately for retirement. We continue to call for this to be increased to 12 per cent.’