For 40-year olds to have any chance of an 'adequate' pension they need to put away 26% of their earnings, according to new research from the Pensions Policy Institute.
A report shows that 12 million adults are under-saving for retirement, despite auto-enrolment rolling out to thousands more this year.
"Saving at the minimum automatic enrolment contribution level will not provide an adequate retirement income," is the message from the PPI. Its findings show that someone saving the minimum rate of 8% of their salary has a less than 50/50 chance of achieving an adequate retirement income.
Even someone who starts saving at age 22 needs to increase their monthly contribution to 12%, including personal, employer and state contributions.
Tom McPhail, head of pensions research at Hargreaves Lansdown, says employers have a responsibility to explain what auto-enrolment is, to ensure opt-out rates remain low. However, he adds, simple steps to improve retirement provision include saving more, working longer and considering alternatives such as equity release.
"Everyone needs to be able to take responsibility for their own retirement, otherwise they'll end up having to work on into their 70s," he comments.
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Figures from the broker show that an individual earning £30,000 per month, who starts contributing 8% of their salary at age 22 – which equates to £162.21 per month – will be left with a total retirement income of £17,047 per year with their state and private pension combined. This is a monthly deficit of £51.88.
If retirement saving is delayed until age 35 this deficit increases significant to £341.05 per month.
Too little, too late
John Fox, managing director at Liberty Sipp, says auto-enrolment is "too little, too late". "We need to urgently reassess the very structure of pensions in the UK, and how people use them. [That structure] has a finality and an inflexibility that puts people off. It doesn't reflect the challenges of modern life," he says.
Fox points to the Canadian system, where individuals can take a tax-free loan from their pension fund to help towards the purchase of their home, as an example of the kind of "thinking outside the box" that is needed.
"[Auto-enrolment is] the retirement equivalient of rearranging the deckchairs on the Titanic; it will not make a jot of difference to the final outcome. So what do we do? We either panic or we try to find new ways to get people saving," he adds.
This article was written for our sister website Money Observer