14th July 2016Auto-enrolment set to create a new cohort of younger savers

This view looks set to change. Over five million additional workers now save into a workplace pension as a result of the introduction of auto-enrolment schemes. Opt-out rates are running well below expectations, bringing to an end the decade-long decline in the number of people saving for retirement.

Pensions starting earlier
Auto-enrolment looks set to bring a large percentage of the younger generation into workplace pensions, creating for the first time a new cohort of savers engaging with their retirement from a much earlier age.

Millennials, those born in the early 1980’s through to the turn of the century, followed on from Generation X, who in turn had succeeded the Baby Boomers. With thousands of them eligible to join pension schemes over the next few years, their savings look set to outstrip those of previous generations.

But will it be enough?
Pension planning will be a new concept for some employees, and getting to grips with future projections and the amount of pension that might eventually be payable could present a real challenge for many.

Although it would be hard not to see auto-enrolment as a very positive step in providing pensions for many more workers than ever before, doubts have been raised in some quarters as to whether the level of savings being made under the scheme will be enough to secure a comfortable retirement.

The minimum amount saved into an auto-enrolment pension is set by the government and will increase over time. It is currently around 2% of salary, made up of 1% employee contribution and 1% employer contribution and 0.2% tax relief from the government. By 2017, the contribution levels will be increased to 8%, made up of a 4% employee contribution, 3% employer contribution and 1% tax relief.

Future projections
According to the Pensions Policy Institute (PPI), even with 8% contributions, pensioners face having insufficient funds for their retirement. The PPI took an example of a person saving from age 22 (the youngest age at which you can be auto-enrolled) and earning an average wage of £27,000 a year, saving the required 8%.

To have a comfortable retirement income (based on two-thirds of working life wages) the worker would need to save enough to generate a retirement income of £18,000 a year in retirement. Their state pension is likely to be around £7,865 by the time they reach their pensionable age of 68, but their pot is likely to be just £56,000. Depending on annuity rates prevailing at the time, this could leave a shortfall that could be as much as £7,000.

However, a fundamental change in retirement planning has taken place and it’s set to benefit millions more younger workers. Automatic enrolment means that employees no longer have to make a conscious decision to save for retirement instead they have to actively decide to opt out.

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