Just over 10 years ago, the UK pension landscape changed forever.
Whilst this might sound overly dramatic – particularly as we are talking about pensions –we simply cannot underestimate the power of auto-enrolment.
Whilst Defined Benefit (DB) Pension Schemes were once the dominant pension scheme, the late 1990s saw this type of scheme begin to lose favour. Figures reveal that in 1997, 46% of UK employees contributed to a DB scheme, whilst in 2021, this figure had fallen to 28%.
This drop is largely due to private companies stepping away from DB schemes; today, just 7% of private sector employees have a DB pension, compared to 82% of the public sector.
The shift left a savings gap for many people. Defined Contribution (DC) pensions were still available; however, employees had to actively opt into the scheme. Consequently, we were left with the looming issue of chronic under-saving for retirement.
Luckily, in 2012, the Government launched the Auto-Enrolment scheme, ultimately transforming how we think about and approach pension saving. But is it the game-changer it is so often heralded as?
The ins and outs
Auto-enrolment is where employees are automatically signed up for their workplace pension scheme. You have to actively opt-out if you don’t want to take part. Every month, a modest amount of an employee’s wage is saved into their pension, and as an additional bonus, the employer tops it up too!
The minimum monthly contributions rate is 8%: 5% from the employee and at 3% from the employer, but different company’s contributions will vary. You must be 22 and over and earn at least minimum wage for this scheme to be eligible. However, thanks to a new bill recently receiving royal ascension, the scheme will soon be extended to 18-year-olds in line with minimum wage, allowing Britons to start saving as early as possible.
Why does it work?
The auto-enrolment policy has been widely praised throughout the pensions sector, and for good reason.
As a result of auto-enrolment, you steadily save money throughout your career without a second thought. In turn, this takes the hassle out of making contributions or calculating what you can afford to save each month. Another positive is that your employer must contribute a certain percentage of your qualifying income, and contributions are flexible, meaning both you and your employer can pay more than the minimum.
Auto-enrolment allows you to save for your pension passively, helping you to afford your dream retirement.
But it could go further…
Despite the ongoing success, there is an argument that it can go further. There are concerns that Britons still aren’t saving enough towards their retirement.
Increasing the minimum contribution to 12% is currently under consideration. This might face challenges within the context of the cost-of-living crisis, but arguably, the more we can save, the better.
It’s easy to lose track of workplace pensions due to the market’s fluidity; the average person will have 12 jobs in their lifetime! The Pension Dashboard will likely address this when it is ready, with a current release date of 31st October 2026. Even though there is currently a government tracking system and consultations on the issue of small pension pots, action needs to be taken sooner to make engagement with pension savings far easier.
Whilst auto-enrolment is a game-changer, it doesn’t influence the matter of engagement and support. We must make sure employees’ pension information is presented in a clear, jargon-free way; sharing page upon page of numbers and different asset classes has never offered savers any real insight into how their pension is performing.
Further, employers must be more active in sharing pension information and making sure support is easily accessible. For example, they could hold company pension briefings or point them toward affordable independent financial advice. In doing so, they will be providing their teams with tools to help them better understand their pension, the options available to them, and how they can achieve the lifestyle they want in retirement.
We can help!
Auto-enrolment is a brilliant way to build your savings without lifting a finger, but it doesn’t quite address the exciting part of actively planning for the retirement you want.
Luckily, independent financial advice is available to provide you with advice if you have any questions about your workplace pension, and the contributions you’ve made, and how you can maximise your savings in the future.
Here at My Pension Expert, we can help you to understand your workplace pension. We are here to assist you in calculating the savings required and establishing a suitable plan to achieve the retirement of your dreams.