We should be saving around six times more into our pension pots to avoid living in poverty in later life, according to a new think tank report.
People in Britain need to save six times more into a pension to avoid falling into poverty when they retire, a think tank has warned.
Workers should be forced to pay into a pension pot, in the same way they pay their taxes, and the opt-out clause should be removed from the auto-enrolment pension scheme.
Without these changes 11 million people are at risk of falling into poverty when they stop working, the report from the Policy Exchange has warned.
Pension poverty
Workers earning the average salary of £27,000 will need to increase their pension savings by six times in order to have an income of £16,200 in retirement, Policy Expert found.
[SPOTLIGHT]The average pension pot currently stands at £36,800. With current annuity rates this would generate an income of just £1,340 per year. The average earner actually needs a pension pot of around £240,000 when they retire, even taking into account their income from the State Pension.
Auto-enrolment, where workers are automatically entered into a pension scheme which both their employer and the Government contribute to, began in 2012. Read Workplace pensions: what it means for you.
All employers are required to sign up but there is an opt-out clause which means workers can choose not to take part. There are also restrictions around who can join; for example the earnings threshold is £10,000. Read Changes to auto-enrolment push 170,000 out of pensions.
The typical contribution to a pension through auto-enrolment is 8%. The report calculates that workers saving this amount over 40 years and earning the average salary would save around 55% of what they actually need to generate an income of £16,200.
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Ageing population
Combined with the problem of low savings, the number of elderly people in the UK is set to rise. During the next 50 years the number of people aged 65 and over is expected to increase from 17% to 24%.
Paying to support this elderly population will cost more as long-term care and pensioner benefits will equate to 12.4% of GDP in 50 years, almost a 50% increase on today’s level of 8.4%.
James Barty, author of the report, said: “If individuals do not save more to fund their own retirement the burden on the state will become increasingly intolerable.
"The obvious solution is to ensure that people save enough for retirement so that they can enjoy that retirement without being a burden on the state.”
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Help to Save
Policy Exchange believes a new scheme should be set up called ‘Help to Save’. This would remove the opt-out option, forcing more workers to build up a pension pot. The idea behind it is to take the burden away from the state to pay for pensioners.
Under this scheme the contribution rate would increase to 12%, rather than the current level of 8%.
The annuities market would be addressed to increase the choice on option to retirees. The Government could issue annuity-like Government bonds which retirees could buy instead of standard annuities.
This would make it easier to work out the amount of interest to be paid. When these expired insurance companies and pension providers would then offer products to buy – effectively splitting up the life insurance and the interest payment parts of an annuity. Read How to buy an annuity.
What do you think? Should people be forced to save for a pension? Are you saving enough? Let us know your thoughts in the comments box below.
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