Labour's pension system overhaul could leave savers £217,000 better off in retirement

Following the Government’s announcement of a Pensions Review, Standard Life analysis has calculated the long-term impact of boosting auto-enrolment on retirement outcomes.

The Government's Pensions Review will assess the adequacy of the nation’s long-term savings as well as how this money is invested. Their mission is to "boost growth and make every part of Britain better off".

Increasing minimum contributions could improve the prospects of UK workers and ensure they are on course for a more comfortable retirement.

Currently, the minimum auto enrolment requirement are eight per cent - five per cent from an employee and three per cent from an employer.

If the Government raises the minimum contribution amount, savers could be hundreds and thousands of pounds better off.

For example, Standard Life’s analysis finds that someone who began working full-time with a salary of £25,000 per year and paid the current minimum monthly Auto Enrolment contributions from the age of 22, could amass a total retirement fund of £434,000 at the age of 66 (not adjusted for inflation).

However, if standard Auto Enrolment contributions were increased from eight per cent to 12 per cent (e.g. six per cent employee, six per cent employer) from the age of 22, they could accumulate as much as £651,000 by the age of 66 – £217,000 more than the current standard contributions could achieve.

Gail Izat, managing director for workplace pensions at Standard Life said: “It’s great to see the Government include savings adequacy in the second part of their Pensions Review.

"As we approach auto-enrolment’s 12th anniversary, it’s important to celebrate the achievements of the scheme while acknowledging that we need to do more to help people secure a decent standard of living in retirement.

"Our calculations show that raising minimum contributions could be a powerful way of setting people up for pensions success and future financial wellbeing, benefiting both employees and businesses in the long-term.

“In other countries like Australia, where minimum contributions are set to reach 12 per cent from next July, higher contributions have led to greater savings adequacy and a higher anticipated standard of living in retirement than the UK.”

As many as 17 million UK adults are not saving enough to retire when they want on the income they want, so a plan to increase minimum auto-enrolment contributions is "crucial" to addressing widespread under saving.

Auto-enrolment has been an important policy to boost pension participation, but the current minimum rate is unlikely to provide most people with enough savings to achieve the income in retirement that they want or expect.

Patrick Thomson, Head of Research Analysis and Policy at Phoenix Insights, Phoenix Group’s Longevity think tank said: "Engagement with pensions is low and there is a risk that people are lulled into a false sense of security that the statutory contribution rate will provide enough savings for their retirement needs.

"We hope the Government’s review of pension adequacy will pave the way for an increase to minimum contributions when the economic conditions are right.”

An expansion of automatic enrolment is just one way the UK can avoid a retirement “cliff edge” and close the "pension gap" for future generations, according to consultant Mercer.

Against a backdrop of the new Labour Government’s pensions review, launched this month, Mercer’s road map called on the retirement industry to explore an expansion of automatic enrolment to cover participants from the age of 18, rather than the current age of 22, and to cover the so-called gig economy.

Contribution rates should also be increased to a minimum total of 12 per cent, up from the current 8 per cent and for steps to be taken to close the retirement gender gap.

Consolidation was also in the cards, with a call to promote the bringing together of multiple defined contribution plans, and for increased oversight in relation to the master trust market.