Pensions have been in the news a lot over the past few years. 2012 saw the introduction of auto enrolment, where all eligible employees of a business are automatically enrolled into a company pension scheme. This year saw the introduction of pension freedoms, where people are now free to do what they like with their pension pot instead of being forced to take out an annuity which often weren't good value.
Despite this, there doesn't seem to be any significant drive by the under 40s to save into a pension at a rate that would enable them to match the standard of living they enjoy today. Recent research suggests that an average 35 year old has put away £14,000 for their retirement. The staggering fact is that if they want to enjoy exactly the same standard of living as they do today in retirement, then they will have to save over £660,000 into a pension plan. This frightening figure suggests that millions of people under the age of 40 could realistically be facing a future in poverty.
Will auto enrolment come to the rescue?
Yes. And no. The auto enrolment scheme by the government has already seen 5.4 million people on low to middle incomes automatically enrolled into an occupational pension in the past 3 years, and it is expected that another 5 million workers will be auto enrolled by the end of the rollout. With figures indicating that 90% of people auto enrolled choose to stay in the pension scheme they been enrolled into, it means millions more will be saving for retirement.
But are they saving enough?
The answer is no. Total (employer and employee) minimum contribution rates are just 2% to begin with and will gradually rise to 8% from 2018. This simply isn't enough to provide people with a comfortable retirement. People will need to increase their contribution levels significantly if they want a standard of living that is anywhere near their current one. That said, we shouldn't see this as a fault of the auto enrolment scheme. The fact is, without it, the country would be facing a pensions crisis of a huge magnitude compared to the one that we are facing now.
The government have shaken up the pensions market and has got people saving into pensions. The task now is simply to get them to save more.