New research shows that people’s rainy day funds could take a 10 per cent hit if they have to save more of their pay for retirement.

It found that a jump in auto-enrolment minimum pension savings from 8 per cent to 12 per cent of earnings could rob people of almost as much surplus income at the end of each month as it would their net financial assets.

The target of 12 per cent retirement savings – split between contributions from individuals, employers and the government – has broad support among financial experts.

Auto-enrolment: employers must contribute at least 3 per cent of earnings between £6,240 and £50,270 into staff pensions

This was recently called for by a top industry body phased in between 2025 and 2032, with employer contributions increasing to 6 percent – although the government will not depend on whether it will consider this plan.

The Association of British Insurers also highlighted the option to “opt out” of the 12 percent or “opt in” from the 10 percent minimum.

How much should people save for retirement now?

Under auto-enrolment, employers are required to put a minimum of 3 per cent of earnings between £6,240 and £50,270 into an employee’s pension. Tax relief from the government provides another 1 percent.

Workers must contribute at least 4 percent in their own name, and if they refuse, all of the above is lost.

Who pays what: automatic breakdown of minimum pension contributions for basic rate taxpayers now

Who pays what: automatic breakdown of minimum pension contributions for basic rate taxpayers now

Hargreaves Lansdowne, which carried out a study of the impact on people’s “dark days” with forecasting company Oxford Economics, says minimum pension savings should not increase further.

The financial services firm suggests that its research shows that any increase in long-term financial stability resulting from increased retirement savings will be offset by a drop in short-term savings.

He is urging the government to instead look at how to get people to voluntarily increase their contributions if they are able to do so, including encouraging employers to pay higher contributions if workers choose to pay more.

How was the impact on rainy day savings modeled?

The Hargreaves Saving and Resilience Barometer is compiled in partnership with forecasting firm Oxford Economics.

It is based on data from the Office for National Statistics’ Wealth and Wealth Survey, which draws on information from 10,000 households, as well as other data from official sources.

Hargreaves says the barometer is built around five pillars of financial behavior – controlling your debt, protecting your family, saving for a rainy day, planning for the future and investing to make more money.

New research suggested that any changes to pension savings would be introduced in early 2025, when the current cost-of-living crisis and its effects are likely to be over.

He analyzed the impact these measures will have on people’s short-term savings and financial resilience until the end of 2029.

Many employers already offer this as an incentive to recruit and retain staff, and Hargreaves points to previous analysis showing that six in 10 people could increase their pension contributions if such an arrangement were available.

According to Hargreaves, this could be popular as people would only increase their contributions as needed and the increase in employer payments to banks would target those who appreciate them.

“Increasing retirement savings is very important, but it can’t be done in a vacuum,” says Helen Morrissey, a pensions and retirements analyst at the firm.

“Unless the changes are timed, we risk requiring people to save for tomorrow, which risks undermining their financial situation today.

“If people are struggling to meet their day-to-day expenses, we risk that any further increase in retirement savings will lead to people saving less and even accumulating debt.”

However, Hargreaves supports government plans, announced in 2017 but not yet scheduled, to raise the minimum age for auto-enrolment from 18 to 22 and introduce pension savings from the first pound of earnings if it waits until 2025, when the current cost of living will be pressure and their effects are probably gone.

The study found that these measures would increase people’s long-term financial resilience by the end of 2029.

However, they will cut people’s rainy day funds – three months’ salary in emergency savings – and their net financial assets, by both 3.3 per cent and their extra income at the end of each month by 3 per cent.

Morrissey says: “The scenarios modeled by the Barometer show that the impact of moving to a 12 per cent minimum contribution will be much greater than the 2017 review reforms.

“They have the potential to make a real difference to pensions, but they will also have the immediate effect of eroding daily surplus income and the ability to build savings and other assets over the long term.

“People on lower incomes are particularly affected, as are young people who can find bigger pensions but are struggling to get on the housing ladder – we think a more nuanced approach needs to be taken.”


Should workers save 12% of their salary for retirement while employers save half?

  • yes 290 votes
  • no 62 votes

A government spokesman says: “We want to make sure that changes are made in a way and at a time that is affordable, balancing the needs of savers, employers and taxpayers.

“Auto-enrolment has succeeded in transforming pension savings, with more than 10.6 million workers taking up workplace pensions to date and saving an extra £28 billion in 2020 compared to 2012.

“The Government’s ambitions for the future of auto-enrolment will enable people to save more and start saving earlier by removing the earnings floor for contributions and lowering the age of auto-enrolment to 18 in the mid-2020s, benefiting young people, low-paid workers and the part-time working day as they will receive contributions from their employer from the first pound they earn.’

What do YOU ​​think about the possible changes in the rules of pension savings?

Readers of This is Money voted 82 per cent in favor of the ABI’s proposal for workers to put 12 per cent of their earnings into retirement and employers to deduct half – see the poll above, which is still open.

Now we’re asking what readers think about plans to raise the minimum age for automatic entry from 18 to 22 and introduce pension deductions from the first pound of earnings. Have your say below.


Should you save for a pension with automatic payment from the first pound of earnings?


Should the minimum age for automatic pension be raised from 18 to 22?

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