Automatic enrolment sends the numbers saving for retirement booming…but millions sleepwalking towards retirement disaster

Tom Selby
20 April 2022

•    Automatic enrolment has driven a surge in the number of people saving for retirement, new official data confirms (Employee workplace pensions in the UK - Office for National Statistics)
•    Since the reforms were introduced in 2012, the proportion of private sector workers saving in a workplace pension scheme has more than doubled from 32% to 75%
•    Across public and private sector pensions the participation rate is 79%, representing 22.6 million employees
•    Employees who aren’t eligible for auto-enrolment – including low earners and young staff – are significantly less likely to contribute to their workplace scheme
•    Millions of self-employed workers are not catered for by auto-enrolment at all, with significant numbers having little or no pension wealth
•    What’s more, for millions of employees the minimum auto-enrolment contribution rate will deliver retirement disappointment
o    A 30-year-old earning £30,000 a year could end up with a fund worth around £306,000 at 68 (state pension age) if they contribute 8% of their salary into a pension each year*
o    This could deliver pre-tax income in drawdown worth £10,000 a year until age 97, along with £76,500 tax-free cash**
o    A 40-year-old earning £30,000 a year could end up with a fund worth £168,000 at 68 if they contribute 8% of salary per year*
o    This could deliver a pre-tax income in drawdown worth just £5,500 a year until age 97, along with £42,000 tax-free cash**

Tom Selby, head of retirement policy at AJ Bell, comments:

“Automatic enrolment has undoubtedly been successful in dramatically boosting the number of people saving something for retirement. 

“However, the reforms remain half-baked, with millions of people ineligible and minimum contributions too low to deliver a decent income in retirement. 

“Making ends meet is extremely challenging for lots of people at the moment, let alone saving for the future. 

“But the reality is if you don’t take responsibility for your retirement sooner rather than later, you risk being forced to work until you drop or accept a lower standard of living in your later years.”

Minimum contributions risk delivering disappointment

“Even those covered by auto-enrolment are at serious risk of retirement disappointment. A 30-year-old contributing at the minimum until state pension age who spends their 25% tax-free cash might only be able to enjoy a drawdown income of around £10,000 a year until their mid-90s.

“Someone earning £30,000 a year who is first auto-enrolled on their 40th birthday on the same terms faces an even bleaker retirement, with their fund potentially delivering an income of just £5,500 a year until their mid-90s.”

Iceberg right ahead!

“What’s more, millions of self-employed workers remain entirely excluded from auto-enrolment, with many saving little or nothing for retirement. This is the section of the labour market most at risk of retirement penury, with no specific plans currently in place to help them. 

“To put it bluntly, as things stand self-employed workers are like the Titanic, unwittingly on a collision course with a giant retirement iceberg. Without urgent action, this will become the next pensions disaster in the UK.”  

*Assumptions: salary increases by 2% each year, investment growth post-charges of 4% each year, contribution based on total salary
**Assumptions: income increases in line with 2% inflation, investment growth post-charges of 4% each year

Tom Selby
Head of Retirement Policy

Tom Selby is a multi-award-winning former financial journalist, specialising in pensions and retirement issues. He spent almost six years at a leading adviser trade magazine, initially as Pensions Reporter before becoming Head of News in 2014. Tom joined AJ Bell as Senior Analyst in April 2016. He has a degree in Economics from Newcastle University.

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