Pensions on the rise but there are still challenges ahead


Thanks to auto-enrolment, more people than ever are saving into a pension. As minimum contributions have risen again this year, the amount employees are putting to one side for the future has increased too. However, research indicates that despite these positive steps, there are still challenges ahead.

Whilst the pension shake-up requiring all employers to offer full-time staff a pension may not affect you personally, it’s likely to have had an impact on how children or grandchildren are saving for later life.

Auto-enrolment started being phased in during 2012, starting with the UK’s largest employers. Since 1st February 2018, all eligible workers should be automatically enrolled into their employer’s pension scheme. The shift aims to encourage more people to save and start thinking about how they’ll create an income in retirement. Employees contributing to their Workplace Pension benefit from tax relief as well as employer contributions topping up their savings.

Since the initial launch, there have been two increases to the minimum contribution levels. From April 2019, employees have a minimum contribution of 5% of qualifying earnings. Whilst employers must contribute a minimum of 2%.

The success of auto-enrolment

According to figures from The Pensions Regulator, auto-enrolment has been a success. It’s estimated that ten million more people are now saving for retirement. It’s good news that the latest retirement report from Scottish Widows highlights too:

  • 59% of those aged over 30 are now saving adequately; the highest the figure has been since the survey began in 2005
  • Over the last year, there has been an 11.8% increase in the proportion of people that say they are saving something
  • There’s also been a 4.8% increase in the average savings, as a percentage of income, for those who are saving

The challenges that remain

  • Saving an adequate amount

Whilst more people are saving adequately for retirement, there’s still a significant portion that is not. Auto-enrolment runs the risk of people believing that making the minimum contribution will afford them the retirement lifestyle they aspire to, which for many, isn’t the case.

Of those aged over 30, Scottish Widows found almost six in ten are saving adequately (defined as 12% or more of their income). In contrast, 11% are saving less than 6%, which is equivalent to the minimum contribution. Around 14% are contributing between 6% and 12% of their income. It could mean future retirees will have to adjust their expectations. Worryingly, 17% of over 30s aren’t paying into a pension at all.

  • Fewer Defined Benefit pensions

As the cost of providing and running a Defined Benefit schemes rises for employers, the number of them being offered are falling. As Defined Benefit pensions provide a reliable income throughout retirement, this decline could mean more people face instability in future. Whilst those saving into a Defined Contribution pension do have the option of purchasing an Annuity, it’s becoming more popular to opt for a flexible income via Flexi-Access Drawdown.

Of those people deemed to be saving adequately into their pension, 44% are part of a Defined Benefit scheme. As a result, it’s likely that many people with only a Defined Contribution scheme, who consequently need to take greater responsibility for retirement income, aren’t saving enough.

  • Engaging with younger generations

Whilst most employees over the age of 22 will now have a Workplace Pension, the younger generation is still not saving enough. Pressure on wage growth since the 2008 financial crisis and struggles to get on the property ladder has meant that saving into a pension often isn’t a priority. Among those aged between 20 and 29, only 40% are saving adequately for retirement.

Starting retirement savings early means young workers have far more time to benefit from compound growth. This process of returns going on to generate returns of their own can significantly boost retirement savings over the long-term.

  • Workers missing out on auto-enrolment benefits

Some people, such as the self-employed, aren’t benefitting from auto-enrolment which may mean they’re missing out on valuable savings. As a result, it’s perhaps not surprising that more than four in ten are saving nothing at all. When you consider that 15% of the UK’s workforce (which is around five million people) are self-employed, it’s a concerning situation.

Ineligibility for auto-enrolment is also affecting those that work part-time and earn less than £10,000 a year. Even if employees cut their hours temporarily, to raise children, for example, not paying into a pension can have a significant impact in the long-term.

If you have any questions relating to your retirement income, whether you’re building up your nest egg now or approaching retirement, please get in touch.

Please note: A pension is a long-term investment not normally accessible until age 55. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available at retirement.  Workplace Pensions are regulated by The Pensions Regulator.