With the ten-year anniversary of the introduction of auto-enrolment (AE) approaching on 1 October, new analysis from St. James’s Place reveals the potential value that these retirement pots could reach through consistent saving.
A person who has been auto-enrolled since the AE regime began in October 2012, could have already amassed a retirement pot of £10,967 by next month’s anniversary, providing they’d taken no breaks in contributions. The analysis assumes an annual net return of 4.5 per cent and is based on an individual with ONS average weekly earnings (AWE).
Looking further ahead, those that remain auto-enrolled have the potential to grow a much more substantial pension pot for later in life – particularly if they, and/or their employer, are able to increase contributions. For example, someone who continues to pay the minimum monthly contributions (currently 3% employer, 5% employee) from October 2022 could accumulate a total pot of £168,443 after another 25 years, assuming the same growth rate of 4.5%. For employers and individuals who are able to pay higher monthly contributions, this can of course lead to a larger pot at retirement. For example, a 10% monthly contribution could amass a total pot of £202,314 over the next 25 years (assuming 4.5% growth and monthly payments increasing to 10% from October 2022).
SJP’s analysis further highlights the benefits of auto-enrolling as early and for as long as possible. It shows that someone that has been auto-enrolled from October 2012 could amass a total of £331,293 by the time they are approaching retirement age in 2057 (assuming minimum contributions throughout). If contributions are increased, the fund could be much larger:
|Contribution level||Total pot in October 2022 – after 10 years of AE||Total pot in October 2047 – after 35 years of AE||Total pot in October 2057 – after 45 years of AE|
|Minimum to October 2022, 8% thereafter||£10,967||£168,443
|Minimum to October 2022, 10% thereafter||£10,967||£202,314
*Assuming saving had begun when AE was introduced in October 2012, with no pauses to contributions and an assumed growth rate of 4.5% which is not guaranteed and could be lower or higher than this.
According to the ONS, participation in a workplace pension has increased from 47% in 2012 to 79% in April 2021. The phased introduction of automatic enrolment was a policy introduced by the government to encourage more people to save for retirement. Since 2012, legislation has required UK employers to automatically enrol eligible employees (and certain other workers) into a qualifying workplace pension.
Claire Trott, Divisional Director of Retirement Planning at St. James’s Place, says: “It’s a very difficult savings environment at present, with skyrocketing prices for everyday essentials such as food and fuel. Unfortunately, conditions look set to get even tougher in winter as rising energy prices kick in. Understandably, most people are focussing on coping in the short term, rather than planning for the long term.
“However, even in difficult periods where it may be tempting to pause or stop contributions, if your circumstances allow, it’s beneficial to maintain your full workplace pension contributions. Our analysis shows that over time, you can build up a very healthy retirement pot just through your workplace pension. Auto-enrolment has been a positive initiative in the past ten years to encourage people to save for retirement. It’s worth remembering that anything you pay into your pension comes with tax advantages, and you benefit from employer savings as well. Furthermore, if you are in the position to top up, or your employer pays higher monthly contributions, this could make a substantial difference down the line and pave the way for a more comfortable retirement.”
Claire Trott shares key facts to be aware of about auto-enrolment:
- The benefits of tax relief – When you save into a pension, subject to certain limits, normally you automatically receive tax relief, with some of the money that would have gone to the government as tax going towards your pension instead. As pensions are invested, this tax relief helps to boost your savings for the future. By paying more into your pension, you will get more tax relief, helping to build your fund quicker.
- Starting early and topping up pays off – If you can top up your monthly payments, the sooner you do this, the greater benefits you’ll reap in the future. Clearly, circumstances at present are extremely challenging and understandably many people won’t have excess funds available, but the younger you can start to boost your contributions, the more potential there is for a larger pot at retirement. This is because the funds will be invested for longer.
- Check your employer’s contribution – The current minimum total contribution is 8%, and your employer must contribute a minimum amount of 3% of this. Many employers will have more generous contribution rates, perhaps matching increased employee contributions, so it’s worth finding out what your employer offers. Employers paying higher monthly contributions can make a big difference to employees’ futures.