• Official data suggests average contributions to workplace defined contribution (DC) pension schemes in 2019 stood at just 5.1% (https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/pensionssavingsandinvestments/datasets/occupationalpensionschemessurvey - see Table 11 of 2019 dataset)
• For someone earning the average UK salary of around £30,000 this could deliver a retirement pot worth £89,000 after 30 years*
• This could provide a tax-free lump sum of £22,250 and an annual drawdown income of £2,670**
o Alternatively, a healthy 65-year-old could buy a single life annuity worth £2,445 (in addition to taking their £22,250 in tax-free cash)***
• Even when the £175.20 a week (£9,110.40 a year) flat rate state pension is taken into account this implies a total annual retirement income of around £12,500
Tom Selby, senior analyst at AJ Bell, comments:
“Automatic enrolment has been hugely successful in boosting workplace pension scheme membership, with over 10 million people brought into the retirement system by the reforms.
“While this is good news, the fact average contributions remain stubbornly low at 5.1% is a cause for concern.
“If the average UK worker pays in 5.1% for 30 years, they might end up with a pot worth around £89,000.
“Although that might sound like a decent chunk of change, after 25% tax-free cash has been taken it may only provide a retirement income worth between £2,000 and £3,000 a year for a healthy 65-year-old.
“Even when combined with the state pension this points to a total retirement income of around £12,500 – likely far below many people’s expectations.
“Anyone thinking auto-enrolment means ‘job done’ when it comes to saving for retirement needs a sharp reality check.
“Anyone wanting a retirement that goes beyond the bare minimum needs to take responsibility and save beyond the auto-enrolment minimum, either in their workplace scheme or via a SIPP.”
Rule of thumb
“One useful rule of thumb is to aim to save half the age you started contributing to a pension as a percentage of your salary. This implies someone who starts saving at age 20, for example, should aim for 10% while someone who delays until 30 should aim for 15%, and so on.
“If this sounds too steep it’s still worth saving what you can afford. Contributions will benefit from both upfront tax relief and compound investment growth over time, so even relatively small extra contributions can grow into a decent pot of money.”
Where will saving 5.1% a year in a defined contribution scheme get you?
|
|
Salary |
|
|
|
|
Years |
£20,000 |
£30,000 |
£40,000 |
£50,000 |
|
10 |
£13,000 |
£19,000 |
£25,000 |
£32,000 |
|
20 |
£32,000 |
£47,000 |
£63,000 |
£79,000 |
|
30 |
£59,000 |
£89,000 |
£119,000 |
£149,000 |
|
40 |
£101,000 |
£151,000 |
£202,000 |
£252,000 |
*Assumes total annual pension contributions equal 5.1% of salary and 4% per annum investment growth post charges
**Assumes individual takes 4% of their initial fund value each year, rising by 2% each year. The fund would last over 30 years assuming 4% annual investment growth.
***Source: Money Advice Service annuity calculator (quote obtained on 13th January 2021); annuity rises by 2% per annuum
