When auto-enrolment was introduced, a little over five years ago, it was described as a lifesaver for the millions of workers who were projected to end up relying solely on the state pension upon retirement.
And it would be remiss not to raise a glass to the success of the scheme – after all, nobody can argue it is a bad thing that nearly nine million Brits have been dragged into pension saving.
That success risks fostering a dangerous complacency, however, that simply ‘having a pension’ is the same as being on course for the retirement you want. We all know this is just not the case.
While attitudes towards pensions have undoubtedly been improved by auto-enrolment, too many still see the subject in binary terms – no pension-bad; pension-good. The idea the current tiny 1% minimum contribution, which some workers pay into their pension, will allow for a comfortable retirement is plain wrong.
Even if we look to April, when total minimum contributions rise to 5% and then on to 2019 when this rises to 8%, much more needs to be done.
First, there is a concern that opt-out rates could rise because these new minimum contributions will be actively felt in take-home pay. This needs to be addressed head-on – people should be shown in very direct and stark terms what sort of return they can expect if they stop saving for a pension, or just continue to make the minimum payment.
The truth is, even the 8% minimum contribution will not come close to resolving Britain’s pension crisis. If we are to address this looming issue, there must be a much deeper understanding of pensions across the board. Employees need clear guidance on why it is essential to start planning for the sort of retirement they want as soon as possible – it is never too early to begin this process.
Sleepwalking towards disaster
I often wonder why more has not been done to introduce a form of pensions education into schools. Engraining even a basic amount of knowledge and making saving habitual at an early stage could solve this problem once and for all. Education in schools does not, however, help the situation that many millions of people are currently sleepwalking towards.
It is time to start talking pensions at work, in the pub and at the gym. And when this most scintillating of subjects is raised, consideration should be given to potential mortgage and/or rent payments, lifestyle choices and other income. The final and most important question … what percentage of my salary do I need when I’m retired?
For auto-enrolment to deliver fully on its huge potential and to capitalise on the increasing minimum contributions, employers and the government should jointly fund sessions to help employees understand, and make the best use of, their pension.
Costs can be kept to a minimum by using technology such as an online portal – this is a simple but crucial way to ensure the millions of first-time pension savers actually receive the benefit they need. Without it, their pension will be like a lifejacket they do not know how to put on.
Matthew Rankine is director of sales at Liberty SIPP