UK savers would need to invest approximately an extra £23bn* a year into their private pension in order to meet guidance from Pensions UK to put 12% of their annual salary into their pension, new research from Bowmore Financial Planning shows.
Bowmore analysis of HMRC data on incomes and pension contributions show that savers are only investing an average of 3.63% of their salary per year into a private sector pension.
This means that of the £38.7bn** that Pensions UK guidance suggests should be saved annually (based on total contributions of 12%, including 9% from individuals and 3% from employers), only £16bn* is actually being invested.
Bowmore says that one of the reasons that pensions savings are so low are that the self-employed are not covered by auto-enrolment and often forgo contributing to their pensions in order to invest in their businesses.
In addition, most companies calculate auto-enrolment contributions only on earnings between £6,240 and £50,270, meaning that many high earners don’t make sufficient investment in their pension. Auto-enrolment also excludes workers under the age of 22.
According to Pensions UK (the trade association for pension schemes) increasing UK taxpayers’ average pension savings rates to 12% would provide them with an average retirement income of £31,300 per year**.
Gill Millen, Managing Director at Bowmore Financial Planning, explains that with people living longer and healthcare costs increasing with age, it is crucial savers build robust retirement funds.
Says Gill Millen: “The huge gulf between what Pensions UK is recommending people save and what they are saving is alarming. Our data shows that even in their 40s and 50s, when many have paid off much of their mortgage, people are still contributing only 3.3% to 4.3% of their salary into their pension.
“With retirement costs spiralling, it’s more important than ever to have a healthy pension pot. Setting aside money now will be tough for many savers. But failing to do so may create very difficult decisions down the line.”
Even higher earners are systematically underinvesting in pensions despite generous tax reliefs
Bowmore says high earners should maximise the tax reliefs currently available on pensions, especially as salary sacrifice on pensions is being severely restricted from 2029. Currently, investors can save up to £60k tax-free in pensions each year. That allowance can be carried forward for three years***.
Gill Millen says: “High earners benefit from significant reliefs on pension contributions, so they should make the most of them while they are still in place. With the Government chipping away at them, high earners should act now.”
Auto-enrolment leaves high earners saving far less than they should
Bowmore says many wealthy individuals under-contribute to their pensions because they mistakenly assume auto-enrolment pays a percentage of their whole salary into a pension.
Gill Millen says: “For many people whose employer’s default to the “qualifying earnings” requirement for Auto-enrolment, this only covers a small portion of high earners’ income, so it should be seen as a starting point, not an entire retirement plan. Those relying solely on auto-enrolment qualifying earnings for their pension contributions are potentially significantly under-contributing and they should not expect their savings to deliver a comfortable retirement.”
*Source: Bowmore analysis of HMRC data, 2022-23, also factors in an average employers’ contribution of 3%
**Source: Pensions UK, December 2024 – contributions of 12% factors in an average employers’ contribution towards a pension fund of 3%
***The annual pension allowance starts to reduce once your income (excluding pension contributions) goes over £200,000. Carry forward is also capped at what you earn in the current year.
**** Auto-enrolment sets a minimum contribution of 5% for employees, based on earnings between £6,240 and £50,270.
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