Average earners could build pension pots worth nearly £250,000 without contributing any of their own money if proposals from the Institute for Fiscal Studies (IFS) come into effect.
The IFS report suggests employers should continue contributing to workplace pensions even if employees choose to opt-out.
Currently, employers are required to contribute at least three percent of employee’s earnings into a pension, while employees contribute a minimum of five percent. However, when an employee opts out, employers are no longer obligated to make payments.
The IFS suggests changing this so employers would still have to contribute three percent, regardless of whether employees opt out.
Calculations by investment firm Quilter for the i show that an average earner could accumulate a pension pot of nearly £250,000 through employer contributions alone by age 67 if contributions started at age 22.
Quilter’s estimates based on salary growth of three percent annually, fund growth of five percent, and 0.5 percent fees, show:
- A lower earner on £22,500 could build a pot of £159,200
- A middle earner on £35,000 could amass £247,630
- A higher earner on £50,270 could accumulate £355,688.
Despite these totals, Quilter warns they would still fall short of what’s needed for a comfortable retirement. The Pension and Lifetime Savings Association (PLSA) suggests £31,300 annually is required for a moderate retirement, which would need a pension pot of £459,000.
Further survey findings from Flagstone highlight the financial gap many workers face in retirement planning. One in five employed individuals doesn’t have a pension, and 69 percent of those aged 55 to 64 have less than £100,000 in long-term savings, far short of the PLSA’s recommendations.
A further 68 percent of Britons haven’t considered how many years of retirement they need to fund, which adds to the challenge of long-term financial security.
The IFS acknowledges the risk that employees might opt out of their pensions if employers are forced to contribute regardless, but it suggests that the policy would benefit the 22 percent of private-sector employees who either opt-out or aren’t automatically enrolled due to low earnings.
Additionally, the IFS report proposes increasing default employee contributions to nine percent for earnings over £35,000 to encourage higher pension savings. This could be vital as Flagstone’s research shows 58 percent of people expect to retire between 65 to 69, leaving only a limited window to boost retirement funds.
Jon Greer, head of retirement policy at Quilter, told the i: “Those relying solely on three percent contributions will face a stark reality in retirement.”
Flagstone’s pension calculator allows users to estimate how much they’ll need to fund their retirement based on their individual circumstances.
