Raising legal minimum workplace pension contributions and extending eligibility for auto-enrolment to younger age groups could add thousands to retirement pots, new analysis have found.
Increasing contributions from both employers and their staff by just four percentage points could add more than £200,000 to a typical final pension pot, according to research by pensions provider Standard Life. Meanwhile, separate findings from the platform PensionBee have shown that lowering the minimum auto-enrolment age from 22 to 18 could add a five-figure sum to pots, should current contribution levels continue.
Both analyses have come as the Labour government conducts a landmark pensions market review. Headed by new pensions minister Emma Reynolds, it will aim to find ways of unlocking additional investment into the UK economy by making defined contribution schemes more ‘productive’.
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There are also concerns that people aren’t saving enough for a basic retirement, and are unaware of key facets of how pension pots work, such as the fact that providers charge fees. With uncertainty over the future of the state pension, many workers expect to never fully retire.
Standard Life: upping minimum pension contributions could be ‘transformational’
Standard Life has urged the government to look into the possibility of increasing auto-enrolment pension contributions, describing it as a “powerful way” of improving living standards in retirement. Under the current rules, which came in almost 12 years ago, workers are required to contribute at least 5% of their salary towards their pension, with their employer topping this up by 3%.
You can contribute more, and some employers offer better top-up rates. For example, firms signed up to The Living Pension accreditation have to offer a scheme that brings about an overall minimal contribution of 12% of a workers wage.
This 12% figure is the one Standard Life believes could have a “transformational impact” on pensions over the course of a worker’s career if it became a legal requirement. It pointed to Australia, where retirees enjoy “greater” savings adequacy and a “higher” anticipated quality of life than here in the UK. The country is set to increase minimum contributions to 12% from July 2025.
The provider’s research has found that an equally split scheme, with 6% of contributions coming from both the employee and the employer, could significantly boost the final pension pot of someone who auto-enrols at the age of 22 and retires at 66. Assuming a 22-year-old full-time worker starts out on a salary of £25,000 and this grows by an average of 3.5% per year over 44 years - with their pot’s investment growing 5% annually and being subject to a fee of 1% - they could have a total pot of £651,000 by retirement.
Under the existing minimum contributions regime, with the same conditions as stated above, their pot would be £217,000 smaller at £434,000. Research by Phoenix Insights - the think tank attached to Standard Life’s parent company Phoenix Group - has also found that up to 17 million adults in the UK are currently “not saving enough to retire” on their own terms.
Its head of research analysis and policy, Patrick Thomson, said: “A plan to increase minimum auto-enrolment contributions is crucial to addressing widespread under-saving. Auto-enrolment has been an important policy to boost pension participation, but the current minimum rate is unlikely to provide most people with enough savings to achieve the income in retirement that they want or expect.
“Engagement with pensions is low and there is a risk that people are lulled into a false sense of security that the statutory contribution rate will provide enough savings for their retirement needs. We hope the government’s review of pension adequacy will pave the way for an increase to minimum contributions when the economic conditions are right.”
PensionBee pushes for pension auto-enrolment age limit extension
Standard Life’s research has coincided with a new report by the platform PensionBee, which has found younger workers could benefit in the long-run if auto-enrolment was opened up to them.
Currently, those under the age of 22 and those earning less than £10,000 a year do not have to be signed up to a workplace pension by their employer. While they can choose to opt in, those earning less than £6,240 have to request entry to any job-related pensions scheme and may not receive any employer contributions to their pot.
PensionBee found that just one in five workers aged 16 to 21 have a workplace pension, despite more than half of full-time students working a 14.5-hour week on average during term time. If workers aged 18 to 21 were legally required to be auto-enrolled under the current system, the provider has worked out that they could ultimately add thousands of pounds to their retirement savings.
An 18-year-old employee earning roughly £5,500 a year, would put around £450 a year into their pension if they were contributing from the first £1 of their earnings. Say they continued to earn at this rate for another three years, taking into account the current rise in the minimum wage from the age of 21, they could have £2,034 by the time they turned 22, and £4,748 extra by the time they retire at 68 (assuming 5% annual investment growth, a 0.7% management fee, and 2.5 average inflation).
Becky O’Connor, director of public affairs at PensionBee, said opening up auto-enrolment to younger adults could “enhance” their financial outlook and raise awareness of defined-contribution pensions at an earlier age. She added: “By making pension contributions a habit from the start of their working lives, young adults are more likely to continue to save consistently, benefitting from the power of compound returns, ultimately making a significant difference to one’s retirement income over the long term.
“If they would rather just keep the money to help get them through their studies - they don’t have to pay in. However, opting in after the introduction of the auto-enrolment extension would potentially be more financially beneficial in the longer run - and this early lesson in setting money aside for the very long term is more likely to reap dividends later on.”
O’Connor called on Labour to present a “clear timeline” for implementing reforms. She warned that a lack of urgent action would mean young lower earners would “continue to miss out”.
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