THE ‘under-savings gap’ in pensions has long been known about...
Ever since final salary schemes began declining, it's been reported that this 'gap' could affect between 9.6 to 12m people.
But a new, in-depth report published by the Association of British Insurers (ABI) which examinines the past decade of auto-enrolment shines a spotlight on what's unravelliing.
While there are almost 10m individuals within the UK enrolled into their workplace pension scheme, those who earn less than £10,000 or are self-employed are still missing out on these pension savings.
Automatic enrolment has without a doubt transformed workplace pensions within the UK, but challenges remain to ensure people are saving enough for their retirement.
The ABI has proposed a roadmap to drive up pension engagement and savings and has called for the government to increase minimum auto-enrolment contributions to 12 per cent by 2031.
The report suggests that these implementations should be made after 2025 and has suggested a timeline for these changes to be implemented.
Currently, employers are compelled to enrol staff into a pension if they are aged between 22 and 'State Pension' age if they earn over £10,000 a year.
One of the three basics for workplace pension contributions is qualifying earnings.
This means that employees pay 5% gross on earnings above the £6,240 lower earnings limit (which is the threshold that allows employees to qualify for certain state benefits, including the basic state pension) and £50,270. Employers match this with a 3% contribution.
The ABI has suggested that policy makers start by reducing the lower qualifying earnings threshold in the next couple of years before gradually increasing the minimum contribution threshold.
Whilst this would have a significant impact on future retirement savings for employees, in line with the current economic climate, many individuals are struggling with the rising cost of living and having to give away additional pay could result in further hardship.
However, we need to be ready to consider the future of automatic enrolment once the economic situation improves and a gradual or phased approach would be beneficial.
With this in mind, the ABI also felt that “savers should have flexibility” and that legislation should act in part, by including an ‘opt-down’ option to 10 per cent.
An auto-enrolment reform is very much welcomed by the industry as a huge step towards narrowing the undersavings gap and protecting those on lower earnings.
After all, current pensions contribution levels are not likely to give people the level of retirement income they expect or need.
Should you wish to review your contributions or require support with your own affordability of workplace pension contributions, please contact us HERE and we will be happy to help.