How much money you should be saving for your retirement is a key question when visualising the type of retirement lifestyle you want. However, the 13th annual Scottish Widows Retirement Report reveals that despite the success of auto-enrolment – 80% of 22 to 29-year-olds are paying something into a pension – 70% of them are not putting away enough. This puts at risk their ability to achieve their desired income of just over £23,000 a year for a comfortable retirement.
The research was carried out online by YouGov across a total of 5,314 nationally representative adults in April 2017. The report found that average contributions are £184 a month (including employer contributions), meaning they can expect an annual pension of just £15,200 including the current State Pension1.
A 30-year-old contributing the current minimum of 1.00% to their workplace pension (matched by their employer) will achieve an income in retirement of £9,734. And even when the minimum contributions rise to 8.00% (employee and employer combined) in 2019, they will only achieve an annual retirement income of £14,047. This is a shortfall of almost 9,000 on expectations2.
There is also evidence that more people will begin to opt-out of pension schemes as contributions increase through auto-escalation from April 2018. When 22 to 29-year-olds were asked if the planned increases would affect how they save, less than half (48%) said they were committed to staying enrolled.
If someone starts saving into a pension at 25 years of age, they would need to put aside £293 each month to reach a £23,000 annual income. Not starting to save until 35, monthly savings would need to jump to £443, and at 45 this would be £724. For someone who left retirement saving to their 50s, they would need to put away £1,445 a month to enjoy a £23,000 annual pension3.
There is no doubt auto-enrolment has been a success in kick-starting the savings habit for millions – but it is not a silver bullet. Auto-enrolment may well be lulling people into a false sense of security that they are putting away enough for a comfortable retirement.
1 Based on someone in their 20s looking to retire at 68 and saving £184 each month
2 The estimates are derived using the Pensions Calculator on the Money Advice Service website, assuming someone earning the UK average of £27,271 a year
3 The estimates are derived using the Pensions Calculator on the Money Advice Service website, assuming someone earning £30,000 a year, with contributions being supplemented with a 4% employer contribution. The calculations allow for inflation, both in discounting back the final results so they’re in ‘today’s money’ and in assuming that contributions increase with earnings each year.