Workers should save at least 12 percent of their salary for a pension, and employers should save half that, according to a ten-year plan by a top-tier industry body.
The current minimum automatic enrollment is 8 percent of salary, with people contributing the most, but some financial experts warn that it is not necessary for a comfortable retirement.
A new minimum of 12 per cent should be introduced gradually between 2025 and 2032, and the division should see employers enter 6 per cent, while workers and government tax breaks account for the rest, says the Association of British Insurers.
Retirement Plan – Should We Save 12% of Salary for a Pension?
With automatic registration, employers are required to put a minimum of 3% of income between £ 6,240 and £ 50,270 on staff pensions. Government tax relief offers another 1 percent.
Workers must contribute at least 4 percent in their own name, and if they are offered all of the above is lost.
Who pays what: Breakdown of the automatic registration of contributions to the minimum pension of basic taxpayers currently
To avoid an “all-or-nothing” situation that could cause some workers to stop opting for pension savings, the ABI suggests two ways to mitigate the impact of rising contributions on pay. the people.
“One option is to increase the total rate to 12 percent with built-in flexibility to turn it off if that rate isn’t affordable for people, which allows more savers to stay automatically enrolled,” the industry body says.
“Another option is to raise the rate to 10 percent with a greater incentive to opt up to 12 percent on a basis of agreement with employers.”
Poll
Should workers save 12% of their salary on a pension, with employers accruing half of it?
- Yes, 142 votes
- No. 27 votes
The ABI suggests that the government and the financial industry should conduct behavioral research to determine which approach is most likely to be affordable and deter people from opting for pension savings altogether.
The current minimum car registration savings rate has been in effect since April 2019 and there is currently no further scheduled increase.
According to the ABI plan, for basic taxpayers, the breakdown of contributions would change to 4.8 percent for individuals, 1.2 percent for tax breaks and 6 percent for employers for 2032.
Some experts have recommended a more ambitious pension savings target in the past, with an influential report suggesting that the goal should be to encourage people to set aside 15 percent of their salary to build a pot for retirement.
The ABI praised the success of the first decade of car registration, which saw the government force all employers to set up pension plans for their workers and help them contribute, and caused that 10 million more people would start saving for old age.
He urged the government to bring forward two more changes that it has already promised but has not yet planned to take: lowering the age limit for automatic enrollment from 22 to 18 and lowering the income threshold by £ 10,000 for contributions. they are made from the first. pound earned.
The ABI has also suggested that the government investigate giving people early access to their pension funds in the event of major financial difficulties.
But he warned against the introduction of automatic increases in the contribution to pensions when people receive salary increases.
The proposals would increase employer contributions from 3% to 6% in 2032
“The huge success of automatic enrollment reflects a long-term plan based on consensus among political parties, industry, and business people,” said Dr. Yvonne Braun, director of long-term savings and protection policies. ‘ABI, which is funded by pension and insurance companies.
“We need the same approach now to determine the future of politics, making sure we include more people and save enough, with the right level of flexibility.”
A government spokesman said: “Automatic enrollment has managed to transform pension savings, with more than 10.6 million workers enrolled in a working pension so far and an additional £ 28 billion saved in 2020 compared to 2012.
“The government’s ambition for the future of automatic enrollment will allow people to save more and start saving earlier, removing the lower income limit for contributions and lowering the age for automatic enrollment to 18 years in mid-2020s, benefiting the youngest, 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 that is affordable and affordable, balancing the needs of savers, employers and taxpayers.”
Tom Selby, head of retirement policy at AJ Bell, says of ABI’s proposals: “Launching a plan to gradually raise minimum contribution rates and ensure a fair balance between employers and employees is a sensible approach.
“Adding flexibility to increases so that employees are not left with an“ all or nothing ”option between saving for retirement or not in the workplace should help reduce the risk of increased exemptions.
“Before that happens, the government must implement the recommendations of the 2017 automatic enrollment review, including the removal of the“ qualifying income ”bands so that every pound earned meets the requirements for an equal contribution and reduce the minimum age from 22 to 18 years.
“Clearly this is a big challenge in a spiraling cost of living context, but each year of delay will increase the risk of a future retirement crisis.”
Selby also called for action to help self-employed people save for retirement.
Helen Morrissey, a senior pension and retirement analyst at Hargreaves Lansdown, says: “Boosting savings levels is a tricky balancing act.
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“We need people to save more for tomorrow, but not at the expense of harming them today, and the ongoing pandemic and cost-of-living crisis have had a significant impact on the financial resilience of the population.”
He points out that in Australia employers contribute 10% of workers’ salaries to their pensions, much more than the current 3% in the UK.
“An initial increase in their contribution to 5 per cent from 2028 would do much to increase people’s retirement income, keeping them contributing to a pension without putting more pressure on their daily finances.
“A further increase in employer and employee contributions of up to 6% each from 2031 onwards would save people a lot more without having to make a huge financial sacrifice; the possibility of opting to increase or decrease would mean that people were not under pressure to make contributions that they themselves could not afford.
Michael Ambery, a partner at Hymans Robertson, says: “Car enrollment has been an undoubted success, and the increase in people contributing to an occupational pension scheme proves it.
“But work needs to be done to further increase participation, especially at those ages below eligibility criteria and for those, especially women, with part-time jobs where participation levels are much lower. “.
He adds: “There is a danger that automatic enrollment may be creating a false sense of security for people who will have adequate retirement income, when quoted levels may not be sufficient.
“While it is still vital to encourage everyone to contribute with the current contribution level of 8%, it could still be below the level needed to get a proper pension.
“Our analysis shows that more than half are not saving adequately for retirement. We continue to call for it to be increased to 12 percent.”
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