Average earners could amass pension pots of nearly £250,000 without contributing a penny of their own cash, if reforms to retirement saving rules suggested by an influential think tank are adopted.
A report from the Institute for Fiscal Studies (IFS) has said there is a “strong case” for most employees to receive money from their employer into a workplace pension even if they do not pay into it themselves.
Under current rules, employers must automatically contribute, at minimum, the equivalent of 3 per cent of most employees’ earnings into a pension. Their employees must pay in minimum of 5 per cent.
However, currently, if employees choose to opt out of paying into a workplace pension, their employer does not have to pay anything in.
The IFS has suggested this could be changed, so that employers must continue paying in the 3 per cent even if the employee stops their own payments.
Calculations for i by investment managers Quilter show that by the age of 67, an average earner could amass a pension pot of nearly £250,000 through 3 per cent contributions alone, if these started when they were 22.
Quilter suggests that if an employee were to opt out of their pension for their entire working life – from 22 to 67 – but had their employer pay in 3 per cent of their salary for that entire time, they could end up with the following, depending on their earnings:
- Lower earner on £22,500 – £159,200
- Middle earner on £35,000 – £247,630
- Higher earner on £50,270 – £355,688
The calculations assume their salary goes up by 3 per cent each year, their fund grows by 5 per cent, and they are charged 0.5 per cent in fees by their platform.
But Quilter says that despite these pension pot sizes looking large, they would not be enough for a comfortable retirement.
The Pension and Lifetime Savings Association (PLSA) has a series of annual income standards that it suggests someone will need to have a basic, moderate, or comfortable retirement, with £31,300 needed as an income for a single person to have a moderate retirement.
Quilter figures suggest this annual income would need a pension pot of £459,000 to sustain.
“Those who believe they can rely solely on 3 per cent contributions would face a stark reality in retirement, as our calculations show that not even someone earning £50,270 a year with 3 per cent contributions to their pension pot and a salary that increases by 3 per cent each year from age 22 will achieve a pension pot that provides them with a moderate lifestyle in retirement, according to the PLSA standards,” said Jon Greer, head of retirement policy at Quilter.
He added that the proposals from the IFS posed a “risk” that some employees could opt out of their own pensions, if they knew their employer would have to pay in regardless.
The IFS itself acknowledges this risk. It says in its report that the policy would benefit the 22 per cent of private-sector employees who either opt out of their pension scheme or are not automatically enrolled due to low earnings, but that a trial period should be run first.
Other reforms suggested as part of the research include increasing default employee contributions for people on average incomes and above.
The IFS said there could be a 12 per cent default total contribution rate for the portion of earnings above £35,000, with the additional contributions coming from employee contributions.
This would mean employees contributing 9 per cent of their earnings, rather than 5 per cent.