Enjoy your employers' cash in retirement

by John Fitzsimons on 01 June 2011  |  1 comment
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Guest blogger Paul Goodwin of Aviva looks at what auto-enrolment could mean for future generations of pensioners.

The UK now has the largest pensions gap per person in Europe (the difference between the income needed to live comfortably in retirement and the actual income people are likely to receive). Standing at £318bn each year for the UK, this figure appears insurmountable.

This large gap is in part to greater longevity. The most recent mortality rates from the Office for National Statistics show life expectancy at birth in the UK has reached its highest level on record for both men and women. A newborn baby boy can now expect to live 77.7 years and a newborn baby girl 81.9 years.

And for all those who reach 65 the odds increase again - men can expect to live for another 17.6 years (taking them to 82.6), and a women can look forward to another 20.2 years (taking them to 85.2).

Auto-enrolment

With more of us living longer it’s no surprise the Government has been busy seeking solutions that will ease the burden on the state.

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One of the foundations of the Government’s reform of the pensions system is compulsory enrolment into workplace pensions for all employees. Put simply, from October 2012 a phased launch will gradually see all employees having to contribute up to 4% of their eligible earnings towards their pension - unless they decide to opt out. If you choose to remain in the scheme your employer will have to contribute 3%, and a further 1% will come from tax relief – taking the total monthly contribution to a minimum of 8% of your salary.

Missing out on employers' money!

The latest Family Finances Report from Aviva examined current attitudes towards workplace pension schemes and how much families already understand about the impact of auto-enrolment.

There are around one million companies in the UK and 37% of full-time employed family heads claim to work for companies that don’t offer a workplace pension at present. With just 28% of full-time employed family heads saying they are actively paying into a workplace pension scheme at present, this would suggest auto-enrolment will mean a significant surge for pensions saving in the UK.

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Looking for reasons why the take up of voluntary workplace pensions is so low, 35% of those in full-time employment and 55% of those in part-time employment blamed the rising cost of living.

However, almost three quarters (74%) of full-time employed family heads said they would be prepared to contribute to a pension if their contributions were matched by their employers.

In terms of how much people would be prepared to contribute – if matched by their employer – the most commonly cited proportion of their monthly salary was 5%. Taking the median salary in the UK to be £25,879, this works out at savings of £1,294 per year.

When combined with matching employer contributions over a 44-year working life, and using Aviva’s pension calculator this could provide a pension pot of more than £250,000. This is significantly higher than the just under £30,000 which makes up the current average annuity pot (as shown in the table below).

Annual pension saving for median UK salary earner (£25,879)

* Using Aviva’s pension calculator 9 May 2011.

The Government is taking direct action to encourage people to provide for themselves more in old age. And while some people will prefer to save through different means such as into their own private pension, there is a compelling argument which says ignoring a workplace pension which offers employer matching  is essentially turning down the offer of ‘free money’.

Paul Goodwin, head of pensions marketing for Aviva.