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Auto-enrolment five years on

Kate Smith

Those on an average salary, making minimum contributions from October 2012, would now have a fund of £2,440. Saving the minimum for another five years, would build a pot of £11,430, from just £4,600 of personal contributions. However, increasing contributions to 10 percent this month would generate a £15,420 pot in five years, more than doubling to £33,480 after ten years. Comment Kate Smith, Head of Pensions at Aegon

October marks five years since auto-enrolment launched in the UK, with a minimum workplace pension contribution of 2 percent of income. During this half decade, more than 8 million people have been auto-enrolled into a workplace scheme1, and according to new analysis from Aegon, for the first wave of employers taking part in the programme, those 2 percent minimum contributions will have already generated a pension pot of £2,440. As minimum contributions rise to 5 percent in April 2018, and 8 percent in April 2019, those choosing to remain enrolled for the next five years will have built a pot of £11,430.

Auto-enrolment was introduced by the government in October 2012 to reverse the decline in the number of pension savers, using inertia to get more people saving in a workplace pension. As soon as someone meets the eligibility conditions, they are automatically enrolled into a workplace pension and start saving a proportion of their salary, as well as receiving an employer contribution. While one can chose to opt-out, this would mean surrendering the employer contribution.

Aegon’s analysis finds that someone on an average income of £26,500 (2017/18), who was auto-enrolled in October 2012, paying the minimum 2 percent of their income as pension contributions, and receiving the average investment returns experienced over the last five years, would now have a fund of £2,440. This total comprises £786 from employee contributions, £983 from employer contributions, £197 from government tax relief, and £474 accrued through investment returns.

Over the coming five years, as minimum contribution levels rise to 5 percent in April 2018, and then 8 percent in April 2019, the same individual would build up a fund of £11,430 by 2022, assuming a 4.25 percent investment growth*. This is an increase of more than fourfold and shows the benefits of the increased contributions and assumed year on year investment growth. Of that sum, £4,600 would be from their income, meaning that the extra £6,830 has been added from a combination of employer contributions, tax relief and investment growth.

Building up £11,430 over ten years is a strong start, especially when many people will work four or five times longer. However, the hope is that people, and their employers, will choose to contribute more. An average earner saving the minimum 2 percent since 2012, but upping their combined contribution to 10 percent from this month, would boost their pot to £15,420 over the next five years, and more than double to £33,480 over ten years.

Kate Smith, Head of Pensions at Aegon said: “Five years on, it is hugely encouraging to see that auto-enrolment is having the desired effect, improving the financial preparedness of workers right across the UK. However, it’s important people don’t become complacent and think that they’re home and dry by simply paying the minimum contributions. Clearly, having some savings is better than having none, so those that have contributed 2 percent of ‘band earnings’ over the last few years are on the right track. But contribution levels do need to increase significantly if people are going to have enough to carry them through retirement comfortably.

“The good news is that minimum contribution levels are set to rise from next April, so people will soon be saving more unless they choose to opt out. But people need to think very carefully before deciding to give on pension savings and lose their employer’s contribution. People in the UK are living longer, and social care costs are now are falling at the feet of more and more retirees. It’s essential that people plan for these sorts of eventualities, and as these figures show, just contributing a little bit more really pays off in the long run. An adviser can help arrive at the right contribution to meet retirement aspirations. ”

* These figures are just examples. They’re not guaranteed. Don’t forget that inflation will reduce what you could buy in the future with the amounts shown. In this projection we’ve assumed a salary of £26,500 will increase by 4.25 percent each year. The figures are based on an illustration created for this purpose.

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