Is auto-enrolment lulling millennials into a state of false security?

21 August 2017

Since the launch of automatic enrolment in October 2012, the number of people saving into a workplace pension has increased from 10.7 million to 16.2 million, according to the government.

Under the scheme, employees are automatically opted in to a workplace pension scheme with personal pension contributions deducted from their salary before they receive it. This is good because you’ll never see the money, which means you can’t miss what you’ve never had.

However, while this is all well and good – and I for one am definitely in favour of an initiative that encourages people to save – today’s minimum contribution levels are tiny.

At present, the minimum you have to pay in is just a teeny 0.8% of your “qualifying earnings” – either the amount you earn before tax between £5,876 and £45,000 a year, or your entire salary before tax – which method depends on your employer.

And even with the additional 1% added by your employer and the 0.2% added by the government, this is highly unlikely to be enough to ensure a comfortable retirement – even if you start saving now. And who knows if the state pension will even be around by the time we millennials retire.

It’s because of this that pension provider Scottish Widows believes auto-enrolment could be lulling under 30s into a false sense of security that they’re putting away enough money for a comfortable retirement.

A survey that Scottish Widows commissioned of more than 5,000 people found that while 80% of 22 to 29-year-olds are paying something into a pension – seven in 10 of these are not putting away enough. Contributions are well below the 12% to 15% of salary that Andy James, head of retirement planning at investment and financial planning company Tilney, believes the average 30 year old should be saving.

The report found that average contributions of 30-somethings are £184 a month (this is including employer contributions). This means that millennials can expect to receive an average annual pension of just £15,200, including the current state pension – well short of the £23,000 a year that they say they need for a comfortable retirement in the future.

Could this picture become worse? At present, opt-out rates for automatic enrolment are less than 10%, according to the government. But April 2019 will see the minimum employee pay-in rise to 4%, the minimum employer contribution rise to 3% and the minimum government contribution rise to 1%. Scottish Widows found that when 22- to 29-year-olds were asked if these planned increases to the scheme would affect how they save, fewer than half of them (48%) said they would stay enrolled on the scheme.

It’s understandably difficult for young adults to save because of high rental costs and high levels of inflation, but the important message to take from this is to try your hardest to put any spare pennies away – especially because the magic of compound interest means that the longer you save for, the more any interest or gains you make can then go on to make their own interest or gains.

As Mr James explains: “Saving just a few extra per cent could make a huge difference. It is far more beneficial for younger people to save a couple of extra per cent now, rather than increase their contributions by 10% when they are in their 50s.”

Catherine Stewart, retirement expert at Scottish Widows, says : “While retirement may feel like a long time away, for those in their 20s, it’s still important that they start to think about it as soon as possible.”