Workplace pension contributions have pushed above £90 billion for the first time and opt-out rates remain low despite an increase in minimum contributions.
Data released this month by the Department for Work and Pensions (DWP) shows that 87% of those eligible are enrolled in a company pension, up from 84% the year before. The proportion of the public sector enrolled in pensions is more than 90%.
Helen Morrissey, pension specialist at Royal London, said the figures are an encouraging sign that employees are getting in the pension habit, but more needs to be done to make sure part-time workers and the self-employed are not left behind.
Total pension workplace contributions climbed £7 billion in 2018 to more than £90 billion. It is likely contributions could break the £100 billion mark this year – particularly after employment hit a record high of 76.1% in May. An increase in the minimum contributions made through auto-enrolment in April could also boost the total even further. Workers must now contribute a minimum of 5% of their salary to a workplace pension, with employers adding a further 3%.
Auto-enrolment, where employees are automatically entered into the company pension scheme unless they opt out, is seen as the driving factor behind the increase in overall contributions.
The scheme was introduced in 2012 as a way of tackling the UK’s pensions crisis. With the decline of final salary pension schemes, increasing longevity and the state pension providing only a modest income, many people were reaching retirement age and finding they didn’t have enough to live on. The burden has now shifted to the stock market, with future pensioners now enrolled in "defined contribution" rather than "defined benefit" schemes.
Ian Browne, pensions expert at Quilter, says there are encouraging signs when you drill down into the figures, too. Firstly, the drop-out rate (where people stop contributions after the first year) is not rising.
Higher Contributions Could Deter Savers
He cautions that these figures don’t take into account rises in auto-enrolment that came in this April. The minimum an employer must put in was raised from 2% to 3% this tax year, with the minimum employee contribution rising from 3% to 5%. The overall contribution is now 8% of qualifying earnings, for those earning more than £10,000 a year.
But there are fears that an 8% contribution could put off younger workers on lower earnings, especially if the auto-enrolment rates keep rising faster than the rate of inflation. Browne says: “It is crucial that savers keep contributing and resist the temptation to opt out when they see a larger chunk of their pay directed into the their pension.”
Encouragingly, however, there has been an 11 percentage point rise in participation among those aged between 22 to 29 since auto-enrolment was introduced. Some 90% of this age group are now contributing to a workplace pension.
“This kind of success underlines the need for continuity and stability for pensions policy,” he says, adding that some suggestions - such as last week’s by Communities Secretary James Brokenshire - would “ultimately cause a huge degree of long term pain” and cause people to have to work into their seventies.
Many pension experts have reacted with dismay to the proposal, arguing that it undermines the key advantage of pensions: that they stop people dipping into funds too early, before the investments have had a chance to grow. Current penalties for withdrawing funds from pensions before your retirement age are punitive and deter most savers from accessing money this way.
Morningstar Investment Management's Dan Kemp says that investors must always focus on their long-term goals and ignore short-term temptations such as withdrawing money too early and checking your portfolio too often: "It takes self-discipline to avoid looking at your portfolio, but it is worth remembering that many of the best investors tend to have long holdings periods and make few changes."
Recent HMRC figures show that the average amount being withdrawn from pension funds is just over £7,000 a year. Even with such modest withdrawals, a retiree with an average-sized pension pot could run out of money in as little as 11 years if their money doesn’t grow based. Charges also have a key role to play in how long funds accessed in drawdown last, experts say.
Morningstar.co.uk's Isa season special in March looked at a range of options for pension savers, including carrying forward unused pension allowances. To carry forward unused pension allowances from the previous three years, you need to have hit the maximum £40,000 limit for pension contributions in this tax year. The deadline for carrying forward your 2016/2017 allowance and qualifying for tax relief is April 2020.
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