Government data shows a 5% increase in the total amount being saved in workplace pensions, but average savings levels fall to an all-time low.
Pensions data from the Department of Work and Pensions (DWP) for 2017 reveals that the total value of savings into workplace pensions rose by £4.3 billion over the year to £90.3 billion.
Overall, 84% of eligible employees took advantage of a workplace scheme in 2017, up from 77% in 2016, as pension auto-enrolment was implemented by a growing number of employers.
However, the amount saved per employee has declined steadily since 2012 as a growing number of private sector pension savers have been automatically enrolled on minimum contributions. The average amount saved fell to below £3,900 per eligible saver in 2017.
The DWP points out that this is expected to improve as the planned increases in minimum contributions for auto-enrolment take effect; the first uplift came into force in April this year, when the total minimum rose from 2% to 5%, and a second rise to a total minimum of 8% will take place in April next year.
Nathan Long, senior pension analyst at Hargreaves Lansdown, comments:“The government’s auto-enrolment regime is responsible [for the current situation], as it throws first-time savers into a pension although it currently insists on only very low saving levels.”
He adds: “Young people are the biggest winners from the rules, as their money works harder for them from a much younger age. The first increase in the minimum saving levels happened in April and will rise again in April next year; by then, the picture should be looking far rosier.”
However, the gap between public and private sector pensions has widened dramatically as a consequence of the decline in average savings in the private sector, with public sector employees having more than twice as much in their pension on average as private sector peers.
Troy Clutterbuck, chief executive of master trust NOW: Pensions, comments:“On average, our members have just £412 saved. Although minimum contributions will rise to 8% of qualifying earnings in April next year, this alone won’t be enough to bridge the growing gap between public sector and private sector pension savings.”
Moreover, the self-employed are currently excluded from auto-enrolment. Their numbers have risen dramatically by 45% since 200, from 3.3 million to 4.8 million. Meanwhile, the number of self-employed saving into a pension of their own accord has fallen from 30% in 2007 to just 14% in 2017.
Tom Selby, senior analyst at AJ Bell, adds: “Even in the absence of an employer contribution, the combination of tax relief, the power of tax-free compound growth and flexibility from age 55 make pensions an extremely attractive option for the self-employed.”
This article was first written for our sister magazine Money Observer.