People are paying less into their pensions (but more have them)

The good news: pension scheme membership is growing. Not so good: the average level of saving is falling. New HMRC figures show that although the pension message is getting through, many remain unaware of how big a retirement fund they will need. Article by Nick Green.

The average person saving into a pension paid in around £200 less last year than they did in the previous year, according to HMRC data. In the 2017/18 tax year, average pension contributions stood at £2,700 compared to £2,900 in 2018/17. Over 40 years of saving, this small difference could result in a pension pot that is smaller by around £19,000¹.

However, the drop is not necessarily the result of individual pension scheme members paying in less. Rather, it seems to be that greater uptake of pension saving is lowering the average annual contribution figure. The HMRC figures also show that the number of people actively paying into a pension pot rose to 10.4m, up by a million on the previous year largely thanks to auto-enrolment. Although this in itself is encouraging, it indicates that many of the new pension scheme members must be paying in far less than £2,700 a year in order to bring the average down.

People aren’t saving enough – and they know it

Saving at the current average rate of £2,700 per year, a saver could expect to have a pension pot of around £260,000 after 40 years. This could be expected to provide a pension income of around £16,000 a year¹ for 25 years using drawdown (although actual results could vary considerably depending on the performance of the stock market). People failing to save this much should of course expect a much leaner income in retirement.

Other research by the Pensions and Lifetime Savings Association has indicated that over half of Brits are anxious that they are not saving enough into their pensions to enjoy a comfortable retirement. Mark Pemberthy, a pensions expert at Buck consulting, stressed that auto-enrolment could only do so much. ‘While a greater number of employees are putting money aside for their retirement, these figures also show that most people are continuing to chronically underfund their retirement,’ he said. ‘Most [defined contribution pension schemes are not designed to generate adequate retirement incomes, and as a result most employees are not saving enough to provide the standard of living they want or expect in retirement.’

How action taken now pays off in years to come

The government recently raised the minimum contribution level to workplace pensions, so that employees must now pay in at least 5 per cent of their salary, while employers must pay in at least 3 per cent. However, based on the UK’s average (mean) salary of £29,000 this translates to an annual contribution of just £2,320 – significantly less than the current average.

Mark said, ‘If these schemes are supposed to be the primary way for employees to save for their retirement, then contribution levels need to increase significantly. It’s vital for all parties involved with pensions to be more honest about likely retirement outcomes [from defined contribution pensions].’

A person saving at £2,320 a year might expect to build up a pot of around £228,000 after 40 years. This might result in an annual income of about £14,000 for 25 years via drawdown – around £2,000 a year less than someone saving up £2,700 a year.

Find out more about saving into your pension or you can also use the Unbiased Pension Calculator to find out if you’re saving enough and discover ways to boost your pension.

^{1  Calculation assumes annual growth of 4 per cent.}