Millions of workers could retire with tens or even hundreds of thousands of pounds more in their pension pots if the Government raises the minimum contribution level, new analysis shows.
Wealth manager Quilter has revealed how small increases to auto-enrolment rates could significantly boost long-term savings.
The figures come amid speculation that Rachel Reeves may ask employers to raise contributions to pension pots in her Autumn Budget.
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.
The commission will also assess ways of improving savings rates among the young, the lower paid, women, and the self-employed. One possible recommendation is that it comes into effect earlier than the current age of 22.
While an increase in the minimum rate is expected, the Government has said this will not happen during this parliament.
Here, we look at how much more your pension could be worth if contributions were increased – and why experts say change is still urgently needed.
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.
Quilter modelled what could happen to a pension pot if those rates increased.
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 = £771,713Even a 1 per cent rise to 9 per cent of savings could mean an extra £64,000 in retirement.
Just a 4 per cent increase could add over £250,000, the figures show.
The exact amount will depend on how investments perform and how much is put into the pot. It will also depend on the rate of inflation, which, in real terms, could impact how much money people are making.
Ian Futcher, financial planner at Quilter, said not enough people are putting away what they need for a comfortable retirement.
Speaking to The i Paper, he said: “It is well documented that people simply aren’t saving enough for retirement.
“There could be a detrimental impact on the quality of life of a large proportion of future retirees as a result.”
He pointed to the new figures from the Department for Work and Pensions (DWP). They show that contribution rates have not changed since 2019. The average remains at around 8 per cent, with most people contributing only the minimum.
Mr Futcher warned: “While this level is what is required, it does not guarantee an adequate retirement income.
“It is concerning that so few people and businesses are contributing more than the bare minimum.”
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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.
Mr Futcher said that increasing contributions “would go some way towards resolving” the shortfall in retirement savings.
He added: “Just a one or two per cent increase could significantly add to someone’s total pension pot.”
The benefits would be even greater for younger workers. With decades of compounding, they would see the biggest gains.
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.
Employers have already faced a significant rise in costs following the changes to employer national insurance contributions in April this year – to 15 per cent from 13.8 per cent.
Mr Futcher said: “A requirement to pay more into employee pensions could place significant strain on businesses.”
And there are concerns about opt-outs as younger and lower-paid earners could find increased contributions to be detrimental to their everyday lives.
He continued: “There is a risk that people opt out entirely if they feel the payments are unaffordable.”
Emma Douglas, wealth policy director at Aviva, said: “Auto-enrolment reforms offer a valuable opportunity to accelerate change. To ensure success, we urge the government to set out a clear roadmap detailing how and when these reforms will be implemented.
“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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