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Increasing the minimum pension auto-enrolment contribution rate to 12 per cent could boost pots by £96,000, new analysis shows.
Currently, the auto contribution rate is 8 per cent, including a 3 per cent employment contribution and a 5 per cent employee contribution.
If raised to 12 per cent, a typical 18-year-old would have an extra £96,000 in their pension pot by retirement age, equivalent to £64 a week.
In total, annual pension contributions could rise by £10bn, according to Phoenix Group, the savings and retirement firm.
In its new report, the company said that delaying the policy change by fifteen years would reduce the benefit of increasing contributions for the average 18 year old by £35,000 and lower their future weekly pension by 37 per cent, assuming retirement at 68-years-old.
Even if delayed by five years, this reduces total savings potential by nearly £10,000 while ten years would reduce the potential by around £22,000.
Under auto-enrolment, which was introduced in the UK in 2012, employers are legally obliged to set up a workplace pension, include their qualifying employees and contribute to their pension savings.
It was launched in a bid to increase the retirement income of workers who found they could not survive on the state pension alone.
However, there have been calls for the minimum contribution rate to increase to 12 per cent, in order to provide sustainable retirement income for savers, amid growing concerns around pensioner poverty.
Analysis by the Pensions Policy Institute (PPI) found that 89 per cent of households are set to miss the moderate Retirement Living Standards, once housing equity is taken into account.
The Retirement Living Standards are “three levels of expenditure to help savers understand how much money they will need to live the lifestyle they want in retirement.”
Under the moderate standard, retirees will have enough for a fortnight holiday abroad each year, £55 a week to spend on groceries and a small car.
Housing is also a rising cost post-retirement. The PPI found that 17 per cent of pensioner households will be living in the private rental sector during retirement by 2041 – three times higher than the current proportion.
Around half of all new homeowner mortgages issued in 2021 are due to end after the borrower reaches age 65, with the average outstanding mortgage debt for someone retired today now around £38,000.
Andy Curran, CEO of Standard Life, believes that it is “crucial” to have a plan “to support greater pension saving throughout people’s working life.”
He said: “Increasing auto-enrolment contribution is fundamental to addressing this challenge, particularly as many people are un-engaged with their pension or have low confidence in their pension knowledge.”
Gail Izat, Managing Director for Workplace Pensions at Standard Life added: “Without action, we risk exacerbating under-saving for people of working age as they move closer to retirement as well as depriving the economy of a highly significant line of finance. Raising contributions as soon as possible has benefits for all.”
