Royal London

Nudging their way to retirement

Samantha Downes

Assistant editor. Financial Adviser

Rather than putting younger people off pension saving, an increase in auto-enrolment contributions appears to be encouraging a whole new generation to think about their retirement, but is it enough?

In under two years’ time the minimum contribution under automatic enrolment (AE) will have risen to 8 per cent of qualifying earnings.

On 6 April 2018 the minimum contribution of earnings rises to 5 per cent and on 6 April 2019 it rises to 8 per cent.

It had been feared that these increases to pension contributions would result in more cash-strapped millennials opting out of AE altogether.

Proving popular

Research by Royal London would suggest otherwise. The pensions provider found that automatic enrolment into a workplace pension had grown in popularity among millennials.

According to Royal London nearly three quarters of those surveyed said they had decided not to opt out after being enrolled and a further 8 per cent said they had opted out but then went back in.

Significantly, 40 per cent said they planned to increase their monthly pension contributions next year.

Jamie Clark, pensions business development manager at Royal London, said the results were encouraging.

He said: “Millennials and the potential concern that many would opt-out when the increases come into effect next year appears to be unfounded. In fact over half told us that they know that they should be saving more into a pension.

“It’s great to see that automatic gradual increase in contributions, perhaps in line with pay rises, is potentially viewed by Millennials as a way to help lessen the financial impact.”

Mr Clark pointed to the fact a millennial who took part in Royal London’s research, had opted-out of her first job’s pension scheme but eventually chose to opt-in when she had a pay rise.

Young workers face a ticking time bomb of paying for higher benefits for current pensioners than they will ever receive themselves --- Hugh Nolan

Not everyone is convinced that many millennials share this approach, and insist more needs to be done to encourage the generation to get serious about pensions.

Hugh Nolan, president of the Society of Pension Professionals, said Royal London’s research had also shown more than a third of millennials would opt out of a pension when the new limits are introduced.

He warned: “The huge success of auto-enrolment to date would be massively undermined if opt out rates rose to this level. Pension contributions remain inadequate and the State Pension is unsustainable. Young workers face a ticking time bomb of paying for higher benefits for current pensioners than they will ever receive themselves.”

Alan Chaplin, partner integration manager at System Sync is also sceptical. He said 2019’s limit would not be enough to plug the pensions gap.

He said: “The 8 per cent limit is unlikely to be sufficient to achieve a reasonable retirement income for most people so it is imperative that there are concrete plans to increase this in the future.”

More money in the pot

Mr Chaplin claimed total contributions needed to reach “at least” 15 per cent for AE to be worthwhile.

He believed auto-escalation, when contribution rates increase in line with pay increases, would be a painless way of encouraging more millennials to up their contributions.

“It is crucial that people don't see their take home pay go down during this building phase,” he said.

His other suggestions included removing the lower band contribution level.

Mr Chaplin said that would mean that every pound earned, up to the upper band, would count, without changing the headline figure of 8 per cent. He said: “Lower earners would benefit the most, as for them the 8 per cent level is actually significantly less than 8 per cent of their total pay.

“Middle earners can afford the extra and it is this population that is most exposed to a reduction in living standards from inadequate pension provision.”

Motivating millennials

Ricky Chan, director and independent financial adviser at Gateshead-based IFS Wealth & Pensions, also believed contributions would remain low unless more creative solutions were introduced.

Most millennials are influenced by their peers and parents’ perception of pensions, which has generally been poor due to numerous changes and mis-selling scandals --- Ricky Chan

Mr Chan believed such solutions should include tapping into the “intrinsic motivation” of millennials, including monetary incentives. Simplifying pensions could also work.

He explained: “Most millennials are influenced by their peers and parents’ perception of pensions, which has generally been poor due to numerous changes and mis-selling scandals.

“They should work to simplify pensions to make it easier for the average Joe to understand. For example, removing the lifetime allowance would be a great start – why punish those who have saved hard or invested wisely by having a lifetime allowance charge.”

Explaining how much of their income they should be saving to achieve the lifestyle they want, how compound investment growth helps grow a pension fund, as well as enabling them to monitor/track their progress using technology would also help millennials prioritise retirement saving.

Mr Chan added that there should be affordable financial advice and a clear line between retirement savings and normal savings.

He said: “Specifically I’m talking about the new Lifetime Isa. Not only is another product just going to confuse most people, but by design, what they don’t factor in is that if people purely saved into this product and then used it to purchase a property 10 years later, they would then not have any savings left for their property.”

Encouraging signs

Mr Chan said the 8 per cent limit also needed to be rethought.

He said: “It’s not even their total salary for most people. The government allowed a ‘qualifying earnings’ definition, which is a small band of earnings of between £5,876 and £45,000 and is what the minimum contributions are based upon.

“So someone earning £45,000 would pay the same pension contributions as another earning £100,000 – clearly as a proportion of total salary, the latter is in fact paying in a lot less.”

Mr Clark agreed that while the signs have been encouraging, providers, employers and financial advisers all have a duty to ensure employees are engaged in their future pension planning.

He said: “They need to fully understand the consequences of opting out of their workplace pension. And although saying they are saving, there is the risk some may still sleepwalk into poverty in their retirement by not regularly reviewing their savings and not taking advantage of opportunities to increase their pension savings when possible.”

Samantha Downes is assistant editor at Financial Adviser

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