4th October 2013
You need to put more into your pension and investments than the new auto-enrolment minimum argues Patrick Connolly CFP, Certified Financial Planner with Chase de Vere.
It is widely recognised that many people aren’t saving enough to fund their own retirement and so we are fully supportive of Auto Enrolment, which needs to play a key role in addressing this. The size of the problems shouldn’t be underestimated, with less than 40% of male private sector workers and less than 30% of female workers saving in a workplace pension plan. This compares with the public sector where participation rates are over 80% for both men and women and where scheme members typically have access to higher quality benefits.
As Auto Enrolment approaches its first anniversary there are positive signs that it is helping to create a retirement savings culture in the UK. There are now considerably more people saving into a pension. Since the first employer, Royal Bank of Scotland, launched its auto-enrolment strategy, some 2,250 companies employing around 10 million people have created 1.6 million new retirement savers, with the number of employees opting out being surprisingly low at around 9%.
Those under the age of 30 have been the most receptive to becoming new savers with an opt-out rate of 8% compared with the overall average of 9%. This could be due to a combination of younger workers realising that the state won’t look after them adequately in retirement and some older workers thinking it is too late to start saving.
Of the 10 million employees, 5.5 million were already in their employer’s schemes but sadly, around 2.5 million weren’t eligible to be auto-enrolled because they were too young, too old or earning too little. Sadly, many of the latter group will be part time employees who are predominantly female.
While the opt out figures are encouraging, it will take more than this to engage people fully with pensions and to negate the years of negative publicity related to high pension charges and commissions and the damaging effects of politicians continually meddling with pensions rules and regulations.
We may also see opt outs increase as minimum contribution levels rise from a fairly insignificant £3.20 each week for somebody on the national average wage, to the final rate of £16.00 each week. For some people higher payments might mean a choice between saving into a pension and going on holiday.
We strongly encourage most employees to participate in Auto Enrolment and to build up their own pension savings. Even for older employees who might feel it is too late, it is better to save something rather than nothing at all.
An important point though, is that while Auto Enrolment can provide a foundation for people’s retirement planning, on its own it is unlikely to provide them with the standard of living that they want in retirement.
People should therefore do more than simply contribute the minimum amounts into an Auto Enrolment pension. To help generate enough income in retirement they must also look to make additional pension contributions and to invest regularly in cash and/or stocks and shares ISAs.