Advertisement

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.

Advertisement - Article continues below

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.

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.

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".

Advertisement
Advertisement

Recommended

Companies cut back on their pensions bills
Personal finance

Companies cut back on their pensions bills

Britvic is the latest firm hoping a cheaper inflation index will cut pension costs. David Prosser reports.
28 Aug 2019
We're all going to have to be a lot more flexible
UK Economy

We're all going to have to be a lot more flexible

As the world gets older, we'll all have to retire later and finance it for longer. That's going to take a major rethink about an awful lot of things, …
6 Aug 2020
Don’t be tempted to transfer out of your final salary pension scheme
Pensions

Don’t be tempted to transfer out of your final salary pension scheme

Switching out of final-salary schemes is very rarely a good idea, no matter how much money is on offer
29 Jul 2020
How to have a low-tax retirement in the sun
Pensions

How to have a low-tax retirement in the sun

Greece is to offer a ten-year tax incentive to foreign pensioners. That’s a pretty good offer, says Merryn Somerset Webb. But it might not last.
20 Jul 2020

Most Popular

Gold hits the big $2,000 level – are Aim miners about to play catch up?
Gold

Gold hits the big $2,000 level – are Aim miners about to play catch up?

With the price of gold shooting through $2,000 an ounce, the yellow metal looks unstoppable. Things are so bullish, even Aim-listed junior gold miners…
5 Aug 2020
Don’t despair on dividends – these companies could be set to bring them back
Income investing

Don’t despair on dividends – these companies could be set to bring them back

The value of dividends paid out by UK stocks has plummeted this year as companies “rebase” their payment policies. But things could soon start to look…
6 Aug 2020
Too embarrassed to ask: what is “real return”?
Too embarrassed to ask

Too embarrassed to ask: what is “real return”?

MoneyWeek's latest "too embarrassed to ask” video explains what a real return is and why it's so important for investors.
5 Aug 2020