Workers in auto-enrolled pensions will need to work into their late seventies if they are to achieve the same level of income in retirement as their parents, according to new research from Royal London.
The study, The Death of Retirement, investigated how long people would need to work to get a decent standard of living in retirement if they only paid 8% of their income into their pension.
This is the minimum stipulated by the government under auto enrolment, the scheme that automatically signs workers up for their employer’s workplace pension and is made up of contributions from employer and employee as well as tax relief.
See our Guide to workplace pensions for more on how auto enrolment works.
Assuming a starting age of 22, a worker requiring two-thirds of their pre-retirement income with inflation protection and provision for a spouse if they died first, would need to work until they are 77, if they only contributed the statutory minimum. To get half their pre-retirement income they would need to work until they were just over 71.
Royal London also considered the position for wealthier individuals earning double the national average income – for these savers a goal of 67% of income would be ‘effectively unattainable’ if they only saved the statutory minimum. If they worked until they were 80, it might be possible to get a pension paying half their pre-retirement income.
It concluded that to achieve two-thirds of pre-retirement income workers should be saving 20% of gross pay for the duration of their working life, or 11% if they could get by on half their working salary.
Steve Webb, Royal London director of policy says: “Getting millions more people saving through auto-enrolment is a huge step forward, but many face a cruel disappointment if they think that the current minimum contribution levels will deliver them the sort of retirement they are looking for. Without significant increases in contributions, we could be witnessing the death of retirement.”
See our article on Why you need a pension for more on its importance.