Archived article: This article was correct at the time of publishing. Tax, investments and pension rules can change over time so the information below may not be current.

Is pension auto-enrolment an enemy of young people?

A new report* has highlighted the problems young people face in terms of their future wealth. The world of defined contribution pensions, as well as the introduction of auto-enrolment, has meant that there are many more choices to make when it comes to pensions. Are people making the right ones?

Portmeirion in North Wales

The younger generation – which we would classify as anyone below 40 – may have a rose-tinted view of retirement. When they look at current retirees, they see many people currently enjoying a comfortable retirement with the freedom, and the means, to travel and enjoy their later years.

However, this is not necessarily a situation that young people will find themselves in. The slow disappearance of the defined benefit pension scheme means that people facing retirement further down the line will no longer have a guaranteed income that they can expect in retirement. Instead, they need to be making some serious decisions now, before it’s too late.

The birth of auto-enrolment

The press like to talk about the fact that overall pension contributions are at their highest level for very many years. However, the average contribution fell from 9.6% of salary in 2012 to 3.9% in 2015. This fall means that the average pension contribution will in no way meet the needs of future retirees. A big contributor to this is the birth of auto-enrolment.

Since auto-enrolment came in, employers only have to pay 1% for every 1% an employee contributes. While it’s great that this scheme has forced some employers to contribute to pensions, it has also enabled some previously generous employers to reduce their contributions in line with basic auto-enrolment requirements for new joiners. The lower contributions have therefore resulted in the average percentage being saved going down.

A serious problem

This is a very serious problem with ominous implications. The average 30-year-old should be saving between 12-15% of their earnings into their pension if they want to have a comfortable retirement. But for many, the combination of graduate debt, rising inflation, rental costs and the difficulty getting a foot on the housing ladder means that this is not a realistic figure. The proposed increases in auto-enrolment contributions will be helpful, but will not get anywhere near the required levels of contribution. Saving just a few extra percent could make a huge difference. It is far more beneficial for younger people to save a couple of extra percent now, rather than increase their contributions by 10% when they are in their 50s.

As always, you should consult your financial planner to ensure you are contributing as much as you can – at every stage in your life – to try to secure a comfortable retirement.

Would you like to save more into a personal pension?

You can do with our self-invested personal pension, the Best SIPP. If you don’t know where to invest and don’t have the time to research, you can choose one of our Ready-made Portfolios and leave it to the experts – by opening a Ready-made Portfolio for your SIPP, you’ll then pay no service fees for your pension.

With the Best SIPP, it’s easy to control how much you contribute – for instance, you can set up regular savings so that you save automatically each month. Give us a call if you’d like to find out more about the Best SIPP.

*The Decision Citizens: Exploring the retirement challenges facing future generations, a report commissioned by Royal London

Important information

SIPPs are not suitable for everyone. If you don’t want to invest across different asset classes or don’t think you will make use of the investment choices that SIPPs give you then a SIPP might not be right for you.

Self-directed investors should regularly review their SIPP portfolio, or seek professional advice, to ensure that the underlying investments remain in line with their pension objectives.