Government must revise AE or ‘risk leaving a whole generation behind’

Since the introduction of AE in 2012, more than 10m people have been brought into workplace pensions, with a new generation putting money away for their futures. 

But according to recent findings by online platform Interactive Investor, the retirement outcome for too many defined contribution savers still looks grim.

We believe that a savings rate of 12 per cent throughout someone’s working life is the minimum amount that people should be saving. 

Jackie Leiper, Scottish Widows

The survey found two-thirds of respondents said they believed retirement was not a time of pleasure. More than half of non-retirees said they planned to stay on working after retirement, as did one in four current retirees. 

Men are twice as likely to work into retirement for enjoyment as women, with women twice as likely to stay in work for the extra money.

Some 37 per cent of women surveyed said they would need to make major lifestyle changes to maintain their standard of living in retirement, compared with 18 per cent of men.

Not starting a pension sooner was a major regret for 17 per cent of respondents, while 32 per cent of those not yet retired said they regretted not saving enough generally.

The study explored the attitudes and experiences of 10,000 members approaching or in retirement. Of the total respondents surveyed, 57.7 per cent said they expected their household income at retirement to fall below £30,000, while 42.3 per cent expected it to be over.  

Current plan for AE ‘lethargic’

Moira O’Neill, head of personal finance at Interactive Investor, said: “Overwhelmingly, this research puts real flesh on the bones of the gender pensions gap and it is concerning. 

“The inescapable truth is that many women are facing a retirement of financial hardship, which is having a real and lasting impact on their quality of life.”

Although more workers are contributing more than ever, following an increase in minimum contribution rates from 5 per cent to 8 per cent in April 2019, it is only compulsory for workers to be enrolled by their employer if they are at least 22 years old and earn a salary of at least £10,000. 

In its report, Interactive Investor said that while it supports the Department for Work and Pensions’ commitment to reduce the minimum age limit to 18, the “government’s ambition to implement the change in the mid-2020s is lethargic and risks leaving a whole generation of workers behind”. It called on the DWP to revise the eligibility criteria for AE.

Mark Pemberthy, head of DC and wealth at Buck, said it is not surprising to see that many people are concerned about their standard of living after retirement, or are even unsure if they will ever be able to leave the workforce.

He said: “It is important to highlight these concerns because the majority of DC schemes these employees are relying on are currently catastrophically underfunded.”

While AE has certainly increased uptake, it has not gone far enough on adequacy, continued Mr Pemberthy.

“Looking to countries like Australia, it’s possible to see the huge political challenges getting beyond contributions of just 8 per cent,” he said.

“With this in mind, it seems likely that individuals and employers will need to take responsibility for this funding rather than the government.”

Impact of topping up contributions

The earlier savings and investments are started, the greater the benefit from compounding.

According to Interactive Investor’s calculations, a 22-year-old earning £20,000 and saving just an additional £20 a month into their pension (topped up to £25 with tax relief) on top of the minimum AE contributions, could have £28,000 more in their pot when they retire at 67. 

Topping up contributions is especially important for women saving for retirement because they are more likely to work for fewer years than men to have and raise children. Statistically, women are also more likely to live longer.

Jackie Leiper, distribution director at Scottish Widows, said: “We believe that a savings rate of 12 per cent throughout someone’s working life is the minimum amount that people should be saving.”

According to research by the company, a large proportion of young women do not end up saving as much as they would like because they want ready access to money in case of emergencies. 

Ms Leiper added: “Building greater flexibility into pension products would help kick-start a new wave of young female savers, while helping boost the amount that those already saving are putting aside.  

A DWP spokesperson responded: “Over the coming years we will ensure that even more people have the opportunity to benefit from workplace pensions, balancing affordability with saving for later life.”