The latest Scottish Widows UK Pensions Report shows that around half those surveyed are not saving enough for their retirement – and that one fifth are not saving into a pension scheme at all. The worrying figures could doom millions to a significant pensions shortfall.
Inadequate pensions savings
The large-scale study looked at pension contributions made by those aged over 30 and under 65. Scottish Widows looked at how much people needed to save in a money purchase (defined contribution) pension scheme to enjoy an adequate retirement income.
In order to generate 30% of their salary, the pensions giant estimates that workers need to be paying in around 12% of their earnings (including any employer contribution). Only 51% of those surveyed were paying in this much. The average contribution rate is 9%. More worrying, the latest survey found that 20% of workers over the age of of 30 are currently making no pension contribution at all.
Those who belong to defined benefit schemes have better pension prospects, with their employer carrying the cost of providing adequate retirement income. Defined benefit schemes are becoming increasingly rare in the private sector however, although they are still quite common in the public sector – particularly for health service employees.
Younger workers save less for retirement
As well as revealing a general pensions shortfall, the survey shows that younger workers make less adequate pension provision than older ones. 59% of over 50s were classified as making adequate contributions, while for those aged between 30 and 50 this figure fell to 47%.
The percentage of earnings saved by those in a money purchase (defined contribution) scheme also falls with income. For those earning between £10,000 and £30,000 it is 8.8%, while for those earning between £30,000 and £50,000 it is 10.5%.
Which? pensions expert Ian Robinson said: ‘It is particularly worthwhile joining a company pension scheme as soon as you can. An employer’s contribution is like extra pay, which you won’t get if you don’t belong. Early savings also have longer to grow and so are very useful in building up an adequate pension pot. If you leave things too late, you’ll struggle to build up enough.’
Moves to encourage greater pension saving
The reasons for inadequate pension saving are varied. Young workers have other demands on their income, such as repaying student loans and saving for the deposit to buy a house. Those with low incomes cannot afford to spare as much as 12% and may not belong to a pension scheme at all.
One suggestion to encourage greater saving is to express the state pension as an annual figure (£5,311 for 2011-12) rather than a weekly sum (£102.15 for 2011-12). In 2012 the government begins a major effort to boost pension saving with the start of auto-enrolment and NEST.
All workers who earn above £7,475 will be enrolled in a pension scheme by their employer. If their employer has no scheme, they can invest their pension in the National Employment Savings Trust (NEST). As well as contributing to a defined contribution private pension, employees will receive a contribution from their employer and a further contribution from the government. They will build up pension savings and eventually receive a private pension in addition to their state pension entitlement.
For more information on preparing for later life, read the Which? Planning for retirement advice guide.
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