During a year where automatic enrolment will become ‘business as usual’ for the new employer we are reminded that there could be significant long term impacts for employees as a result of decisions they make because of short term issues.
With thanks to Corporate Advisor for their coverage if this report.
A report from Milliman for Royal London models a cash-strapped couple aged 30 with children and a big mortgage, with a combined income of £35,000. If they opt out of auto-enrolment when employee contributions reach 5 per cent and remain opted out until age 55 when their mortgage is paid off and their children are grown up, their retirement income will be 24 per cent lower than if they had remained enrolled in the scheme. The modelling shows a combined state pension of £16,000, topped up by income of £9,700 if they remain enrolled, or £3,000 if they opt out between the ages of 30 and 55. If they opt out when employee auto-enrolment contributions increase to 5 per cent from April 2019. However, they only see an extra 3 per cent of their salary as some of the gain from no longer making contributions to the workplace pension scheme would be offset by an increase in tax and National Insurance contributions. Even if the couple stick with the minimum AE pension contribution they would have to work full-time for five years longer to achieve the £32,000 they will need to maintain their pre-retirement spending habits. Alternatively, if they increase their pension contributions by 6.5 per cent, from 5 per cent to 11.5 per cent, they can eliminate the need to work longer than expected. This works out at an increase in extra pension contributions of 1.3 per cent of salary for each year less having to work. Royal London strategic insight manager Ronnie Morgan says: “The world of DC pensions is a world of ‘Decision Citizens’ – people whose choices during their working life can profoundly affect their quality of life in retirement. Regularly reviewing workplace pension contributions and increasing them ‘little and often’ is a far better strategy than hoping to make up for a lifetime of under-saving close to retirement.
“This research shows very clearly how many people could be heading for disappointment in retirement unless they get the advice and guidance that they need to make good financial decisions throughout their working lives.”
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Public sector staff pay twice as much into pension pots 21 June 2017
Workers in the public sector are saving twice as much into their pensions than those in the private sector, with the gap widening over the past four years.
Figures from the Department for Work and Pensions show that public sector workers saved an average £8,418 into workplace pensions in 2016, an increase of 8 per cent from £7,811 in 2012.
By contrast, those in the private sector saved £4,098 in 2016, 38 per cent less than they did in 2012 when average contributions were £6,627.
According to a report from the Financial Times , pension experts said the gap was exacerbated by the introduction of automatic enrolment. Alistair McQueen, head of saving & retirement with Aviva pensions provider said:
“Millions of workers have been brought into saving through this policy but the minimum contributions of 2 per cent (combined employee and employer) have led to many employers levelling down their contributions from previously higher levels.
What has happened is that private sector employer contributions have been diluted by automatic enrolment whereas they have not been for 5m workers in the public sector.
Around 16m private sector workers could be headed for disappointment in retirement if they do not increase their savings rates to around 12.5 per cent,” said Mr McQueen.
According to separate ONS data, average pension contribution rates in the private sector fell from 9.6 per cent in 2012, when auto-enrolment was launched, to 3.9 per cent in 2015.
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