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Should we save 12% of salary for a pension?

According to a 10-year plan from a leading industry body, employees should save at least 12 percent of their salary for a pension, and employers should find half of that.

The current minimum for auto-enrollment is 8 percent of salary – with individuals contributing the largest share – but some financial experts warn that’s not enough, which is needed for a comfortable retirement.

A new minimum of 12 per cent should be phased in between 2025 and 2032, and the split should result in employers bringing in 6 per cent, with employees and government tax breaks making up the remainder, the Association of British Insurers says.

Retirement Savings: Should We Save 12% of Salary for a Pension?

As part of the automatic enrollment, employers must pay at least 3 per cent of earnings between £6,240 and £50,270 into the staff pension. Government tax breaks offer an additional 1 percent.

Workers must deposit at least 4 percent on their own behalf, and if they choose not to, all of the above is lost.

Who Pays What: Automatic enrollment breakdown of minimum pension contributions for base taxpayers currently

Who Pays What: Automatic enrollment breakdown of minimum pension contributions for base taxpayers currently

To avoid an “all or nothing” situation that could prompt some workers to choose not to save for retirement, the ABI proposes two ways to mitigate the impact of higher contributions on people’s net income.

“One option is to increase the overall rate to 12 percent, with the built-in flexibility to opt out if that rate is unaffordable for people, allowing more savers to stay automatically enrolled,” the industry body says

“Another option is to increase the rate to 10 percent with greater incentive to opt for 12 percent on a matching basis with employers.”

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Should employees save 12% of their wages for retirement and employers pay half of that?

The ABI suggests that government and the financial industry should conduct behavioral research to determine which approach is most likely to be affordable and discourage people from turning away from retirement savings altogether.

The current minimum savings rate for auto-enrollment has been in effect since April 2019, and there are currently no further increases planned.

Under the ABI’s plan, by 2032 the contribution split for principle taxpayers would change to 4.8 percent from individuals, 1.2 percent tax credits and 6 percent from employers.

Some experts have recommended a more ambitious retirement savings target in the past, an influential report suggests The goal should be to encourage people to set aside 15 percent of their salary for retirement.

The ABI hailed the success of the first decade of automatic enrollment, during which the government forced all employers to set up and contribute to pension schemes for their employees, and resulted in 10 million more people starting to save for old age.

It called on the Government to put forward two other changes it has already promised but has not yet implemented – lowering the age limit for automatic registration from 22 to 18 and lowering the income limit from £10,000 to allow contributions from the start to be earned pounds.

The ABI has also suggested that the government investigate whether they allow people early access to their pension pots in cases of significant financial hardship.

But she warned against introducing automatic pension contribution increases when people get pay rises.

Proposals call for an increase in employer contributions from 3% to 6% by 2032

“The enormous success of automatic enrollment reflects a long-term plan based on a consensus between political parties, industry and employers,” says Dr Versicherer.

“We need that same approach now to guide the future of the policy and ensure more people get involved and save enough, with the right amount of flexibility.”

A Government spokesman said: “Automatic enrollment has managed to transform pension savings, with more than 10.6million workers enrolled in an occupational pension to date and an additional £28billion saved in 2020 compared to 2012.

“The government’s ambition for the future of auto-enrollment will allow people to save more and start saving earlier by removing the contributory earnings floor and lowering the auto-enrollment age to 18 in the mid-2020s will benefit younger people, low-paid and part-time workers as they receive contributions from their employer on the first pound they earn.

“We want to ensure these changes are made in a way and at a time that is affordable, and that balances the needs of savers, employers and taxpayers.”

Commenting on the ABI proposals, Tom Selby, head of pensions policy at AJ Bell said: “It is a sensible approach to launch a plan to gradually raise minimum contribution rates and ensure a fair balance between employers and employees.

“Incorporating flexibility into the increases so employees aren’t left with the ‘all or nothing’ choice between retirement or being off the job should help reduce the risk of opt-out spikes.

“Before that happens, the government must implement the recommendations of the 2017 auto-enrollment review, including removing ‘qualifying income bands’ so every pound earned qualifies for an adjusted contribution, and lowering the minimum age from 22 to 18.

“Obviously, against a backdrop of rising living costs, this is a huge challenge, but every year of delay will compound the risk of a future pension crisis.”

Selby also called for action to help the self-employed save for retirement.

Helen Morrissey, Senior Pensions and Retirement Analyst at Hargreaves Lansdown, says: “Increasing savings levels is a difficult balancing act.

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“We need people to save more for tomorrow but not at the cost of harming them today, and the pandemic and ongoing cost-of-living crisis have had a significant impact on the financial resilience of the population.”

She points out that employers in Australia contribute 10 per cent of employees’ wages towards their pension, much more than the UK’s current 3 per cent.

“Initially increasing their contribution to 5 percent from 2028 would do a lot to increase people’s retirement incomes – they would continue to contribute to a pension without further straining their day-to-day finances.

“Further increases in both employer and employee contributions to 6 percent each from 2031 would result in people saving significantly more without having to make major financial sacrifices – the ability to opt up or down would mean that people are not under pressure to make their contributions could not afford.’

Michael Ambery, Partner at Hymans Robertson, says: “Automatic enrollment has undoubtedly been a success and the increase in those paying into an occupational pension scheme is testament to that.

“But work needs to be done to further increase participation, particularly in the age groups that fall under the eligibility criteria and for those, particularly women, in part-time jobs where participation rates are much lower.”

He adds: “There is a risk that automatic enrollment will give people a false sense of security that they will have a decent income in retirement when the contributions they are making may not be enough.

“While it remains important to encourage everyone to contribute at the current 8 per cent contribution level, it could still be below the level needed to reach a decent pension.

“Our analysis shows that well over half do not make sufficient provisions for retirement. We continue to call for an increase to 12 percent.’

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Should we save 12% of salary for a pension?

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