Wealth manager Quilter has revealed how small increases to auto-enrolment rates could significantly boost long-term savings.
Although not confirmed in her Mansion House speech last Tuesday, it was revealed on Monday that a new pensions commission will review the auto-enrolment scheme, which was set up in 2012.
While an increase in the minimum rate is expected, the Government has said this will not happen during this parliament.
What a rise in contributions could mean for your pension
Currently, the minimum auto-enrolment rate is 8 per cent of salary – typically 5 per cent from the employee, including tax relief, and 3 per cent from the employer.
It assumed someone starts saving at age 22, earns the average UK salary of £35,204, and works until 68. With 2 per cent wage growth, 5 per cent investment returns, and 1 per cent in expenses such as advice.
Here’s how the numbers stack up:
8 per cent=£514,475 9 per cent=£578,785 10 per cent=£643,094 11 per cent=£707,404 12 per cent=£771,713Just a 4 per cent increase could add over £250,000, the figures show.
Ian Futcher, financial planner at Quilter, said not enough people are putting away what they need for a comfortable retirement.
“There could be a detrimental impact on the quality of life of a large proportion of future retirees as a result.”
Mr Futcher warned: “While this level is what is required, it does not guarantee an adequate retirement income.
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Many in the pensions industry believed the Chancellor might have used her Mansion House speech to raise contribution rates. Although she did not, Quilter says change could still come in the Autumn Budget.
He added: “Just a one or two per cent increase could significantly add to someone’s total pension pot.”
Quilter has urged the Government to be cautious, though. While higher contributions could help retirement incomes, they also risk placing extra pressure on employers and lower earners.
Mr Futcher said: “A requirement to pay more into employee pensions could place significant strain on businesses.”
He continued: “There is a risk that people opt out entirely if they feel the payments are unaffordable.”
“A phased approach will give employers and savers the time they need to prepare – helping to secure better retirement outcomes for millions of workers.The Government has been contacted for comment.
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