More than four million people have now signed up for their company’s pension scheme because of the government’s auto-enrolment policy, new figures have revealed.
In response Pensions minister Steve Webb said: “This latest milestone figure shows how saving in a workplace pension is now becoming the norm.”
But anyone sitting back and assuming they’ve now done enough to secure a wealthy retirement needs to think again, warns Darren Philp, director of policy at The People’s Pension.
He says signing up for a company pension should be just the start of anyone’s retirement planning. “The problem is that some people will be saving next to nothing,” he warned.
“Under the automatic enrolment rules, employers and employees need only pay one per cent each of the employee’s earnings until 2017. Even after the minimum contributions have reached their maximum, it’s only a total of eight per cent of earnings.”
The contributions only have to be paid on a band of earnings, currently between £5,668 and £41,450. So for many lower paid workers, their actual contribution rate will actually be less than eight per cent.
For example, a worker earning £25,000 a year may only receive minimum contributions on earnings. The contributions could only be 6.2 per cent of their total earnings, well below the eight per cent level.
“When this level of savings has to be spread out over decades of retirement, it does not go a long way,” Mr Philp points out. “This is why the independent Pensions Policy Institute’s research suggests that these saving may not be enough for some people.”
The solution, he says, is to save more. “Starting early can pay dividends. The more you put into a pension pot early on, the more it benefits from investment growth.”