Millions failing to put enough in pension for comfortable retirement, says IFS

Fewer than half of UK private sector employees are putting enough money in their pensions to have a comfortable retirement, according to research, which sets out suggestions for changes in policy.

The research by the Institute for Fiscal Studies (IFS) and the Abrdn Financial Fairness Trust, found that even with automatic enrolment, fewer than half of employees are opting to contribute the 8% of their salary necessary for supporting themselves in later life.

Meanwhile, a fifth still do not save in a workplace pension so they miss out on their employer’s pension contribution. Given these patterns, a set of changes to the automatic enrolment system are needed, argues the report.

While some have proposed increasing minimum pension contributions to 12% of earnings for all, which would boost retirement incomes, there could be some policy changes that would combat this issue more directly.

READ MORE: Pension savings needed to retire jumps amid cost of living crisis

Pension savings and their importance have come into sharp relief in recent months, as the government grapples with ways to balance public sector spending. The Office for National Statistics last week published the latest average earnings figures, which showed annual growth of 4%.

That is the figure that will be used to set the increase in the state pension, which means the full state pension will go up by £460 a year.

The UK is also faced with an ageing population, with the proportion of people in work compared with pensioners set to increase. In the last 40 years, the number of people aged 50 and over has increased by over 6.8 million (a 47% increase), and the number aged 65 and over has increased by over 3.5 million (a 52% increase).

Changing the goalposts

Among the measures the report suggests should be implemented is widening the default age at which people start contributing to their pension. Currently, automatic enrolment happens at 22 — but earners would benefit from widening that so that contributions are made between the ages of 16 and 74 instead.

The research also makes a case for bringing in mandatory employer contributions to at least 3% of total pay, irrespective of whether employees choose to contribute. This would benefit the 22% of private sector employees who either opt out of their pension scheme or are not automatically enrolled due to their earnings being too low, the research said. This would make it less likely to suppress wages for lower-paid employees receiving additional contributions.

READ MORE: How to make sure you’ll get the full state pension

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“There is a strong case for almost all employees to receive an employer pension contribution, irrespective of whether they make a contribution themselves,” said David Sturrock, report author and a senior research economist at IFS. “That would be a bigger change to the system – and one that would likely be of particular benefit to many low earners.”

Meanwhile, an increase in default employee contributions for those on medium and higher wages could make all the difference.

The current automatic enrolment default minimum contributions are 8% of earnings between £6,240 and £50,270. Increasing contributions for those with low current earnings risks reducing take-home pay at a time in life when this can least be afforded. Increasing the default minimum on the portion of earnings above a certain threshold would help some middle and higher earners better supplement their state pension.

For example, there could be a 12% default total contribution rate for the portion of earnings above £35,000 (around median full-time earnings), with the additional contributions coming from employee contributions. Importantly, many on lower lifetime incomes who have higher earnings in some years would also be helped to save more for retirement.

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