Automatic enrolment has driven a rise in the number of people saving for retirement, according to data from the Office for National Statistics.
According to a new report titled Employee workplace pensions in the UK from the ONS, the proportion of private-sector workers saving in a workplace pension scheme has more than doubled from 32 per cent to 75 per cent since reforms were introduced in 2012.
The participation rate in public and private sector pensions is 79 per cent, representing 22.6 million employees. Employees who aren’t qualified for auto-enrolment, such as low-wage workers and young workers, are much less likely to contribute to their company’s pension plan. Millions of self-employed employees are not covered by auto-enrolment, and many of them have little or no pension savings.
According to research, the minimum auto-enrolment contribution rate will lead to retirement disappointment for millions of employees. If a 30-year-old earns £30,000 a year and contributes 8 per cent of his or her salary to a pension each year, at the state pension age of 68, he or she may have a fund worth roughly £306,000. This may provide £10,000 in pre-tax income every year in drawdown until age 97, as well as £76,500 in tax-free cash. If a 40-year-old earns £30,000 a year and contributes 8 per cent of their salary each year, they may have a fund worth £168,000 at the age of 68. This may provide a pre-tax income of £5,500 per year in drawdown until age 97, as well as £42,000 in tax-free cash.
AJ Bell head of retirement policy Tom Selby says: “Automatic enrolment has undoubtedly been successful in dramatically boosting the number of people saving something for retirement. However, the reforms remain half-baked, with millions of people ineligible and minimum contributions too low to deliver a decent income in retirement. Making ends meet is extremely challenging for lots of people at the moment, let alone saving for the future. But the reality is if you don’t take responsibility for your retirement sooner rather than later, you risk being forced to work until you drop or accept a lower standard of living in your later years.
“What’s more, millions of self-employed workers remain entirely excluded from auto-enrolment, with many saving little or nothing for retirement. This is the section of the labour market most at risk of retirement penury, with no specific plans currently in place to help them. To put it bluntly, as things stand self-employed workers are like the Titanic, unwittingly on a collision course with a giant retirement iceberg. Without urgent action, this will become the next pensions disaster in the UK.”
Standard Life Managing Director Pensions and Savings Colin Williams says: “Today’s figures highlight the huge transformation that has taken place over the last decade as auto-enrolment has brought huge swathes of the workforce into pensions for the first time. Since its introduction participation has risen to 75 per cent in the private sector from 32 per cent in 2012.
“As this scheme approaches its ten year anniversary it faces arguably its biggest test to date. The current cost of living crisis is squeezing household budgets and while savings rates have held up well to date, many people will be assessing every cost right now. This is evident in the figures where participation among private-sector workers earning between £100 and £199 a week is far lower than the average at 43 per cent. However, the pandemic indicated that savings habits, once formed, tend to stick and we’d hope that people would take the long view when it comes to preparing for retirement.
“One of the main barriers to increasing participation further is the current structure of auto-enrolment. In time we’d like to see a reduction in the age at which people become eligible to 18 and the removal of the lower earnings limit so that people benefit from the first pound of earnings. At present, the current system disproportionately excludes many women and part-time workers who would like to start saving.”
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