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Auto-enrolment: Minimum may not be enough

Auto-enrolment: Minimum may not be enough

Category: Pensions

Updated: 24/07/2017
First Published: 14/02/2014

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

There is a fear that people are going to be disappointed with the amount of pension they receive as, despite auto-enrolment being well underway, not enough is being paid in.

Auto-enrolment began in October 2012 and was introduced by the Government as a way of ensuring everybody has the chance to save for retirement. If an employee is not already in a pension scheme they will be automatically included in their current workplace scheme if eligible - they must be aged 22 or over and earning at least £9440 a year – although they can choose to opt out.

According to figures released by the Pensions Regulator, nearly 2.9 million of us have already auto-enrolled, and this will eventually rise to 9 million. Presently the employee will be contributing a minimum of 0.8% of their salary, the employer needs to top it up with at least 1% and there will be 0.2% tax relief. By 2018 this will rise to a minimum of 4% by the employee, 3% by the employer and 1% tax relief, totalling the Government's minimum contribution rate of 8%.

The thing people must bear in mind is that this is just a legal rate, not a recommendation for guaranteed comfort in retirement. With many employees and employers sticking to the minimum amount, it looks like financial security in later life could be in doubt.

Auto-enrolment is a way to get people thinking about saving for their retirement, but you need to take an active role in deciding how much you need to put away. The age you are starting at comes into play here, as if you only begin saving in later in life you will need to pay in a lot more.

An example of this is that someone aged 22 on a £30,000 salary, with the minimum 8% contribution being paid into their pot (roughly £200 per month), will be left with a combined (State and private) retirement income of approximately £16,613. However, if they wanted a "comfortable income" – one that's two-thirds of their salary – they would need to be paying in a further £77 per month. This additional funding will rise to £400 if they are beginning at age 35.

There is no simple answer to how much you will need in retirement but many people will be hoping to maintain their current standard of living. Some experts have thrown a few figures into the equation with some saying that around two thirds of your current salary at retirement should be enough to maintain the same standard; this is bearing in mind that hopefully you will no longer have a mortgage to cover. However, you will have to consider what level of lifestyle you personally want and do the calculations yourself.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said: "Auto-enrolment is off to a good start and the numbers joining pension schemes is promising. Unfortunately most people are not contributing enough. Even in another 4 years' time when they are up to the minimum of 8% of earnings, it still won't be enough to provide a reasonable income in retirement. Employees should use auto-enrolment as the catalyst to kick start their savings and put themselves in the best position to enjoy a financially secure retirement."

What next?

Why not learn more from the Department of Work and Pensions Guide on auto-enrolment

Take a look at annuities to find the best deal

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