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.

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".

Recommended

Does part of the £50bn lying forgotten in dormant accounts belong to you?
Personal finance

Does part of the £50bn lying forgotten in dormant accounts belong to you?

Around £50bn of our money is just sitting in dormant bank, savings and pension accounts. Make sure none of it's yours, says Ruth Jackson Kiry=by.
20 Apr 2021
The minimum pension withdrawal age is set to rise – don’t get caught short
Pensions

The minimum pension withdrawal age is set to rise – don’t get caught short

From April 2028, the earliest age at which you can take money from your pension savings will rise to 57. It's vital that you understand the detail of …
13 Apr 2021
Make sure you max out your pension contributions this year
Pensions

Make sure you max out your pension contributions this year

If you're saving for retirement, make sure that you have used up all their allowances before the tax year ends, and contributed as much to your pensio…
31 Mar 2021
Make sure you don't go over the pensions lifetime allowance
Pensions

Make sure you don't go over the pensions lifetime allowance

Breaching the lifetime allowance for pension savings could prove very costly, says David Prosser.
15 Mar 2021

Most Popular

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
The FTSE 100 has clawed back above 7,000 – how much higher can it go?
UK stockmarkets

The FTSE 100 has clawed back above 7,000 – how much higher can it go?

The FTSE 100 index has risen to over 7,000 for the first time in over a year – it now sits just above where it was in 1999. But its era of neglect cou…
19 Apr 2021
The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021