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Warning of pension contributions shortfall may be overblown

The typical pension scheme member is only contributing 5% of pay to their pension, raising questions about whether they will have enough to retire on. Yet the situation may not be as gloomy as many people suggest.

Pension-scheme membership hit a record high last year, with some 46 million Britons enrolled in at least one workplace scheme, new official figures reveal. But, the typical pension scheme member is only contributing 5% of pay to their pension, plus their employer's contribution, raising questions about whether they will have enough to retire on.

On the one hand, the growth in pension-scheme membership under the auto-enrolment system introduced in 2012 represents a substantial success. The system requires all employers to offer staff a pension plan and pay into it on behalf of those who have not specifically opted out.

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Over time, the minimum contribution levels have been significantly increased. In April 2018, the minimum contribution was set at 5% of salary, with employers ordered to pay at least 2% of this; these minimums were raised to 8% and 3% respectively in April 2019. And while the average total pension contribution made by members of defined-contribution schemes rose to 5% last year from 3.4% in 2017, members of the typical final-salary (defined benefit) pension plan enjoyed a 25.6% total contribution.

Yet the situation may not be as gloomy as these figures suggest. Young people will often have started saving much earlier than previous generations. And as Merryn Somerset-Webb pointed out recently, our pension system is currently in good shape.

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According to figures from broker Interactive Investor, if you start work on £20,000 at 30, stay opted in, see your salary rise by 1% in real terms a year and make annual net returns of 5%, you will end with savings of nearly £200,000. "In terms of the absolute levels of assets in its pensions, the UK is one of the best-set countries in the world".

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