Auto Enrolment %

[GutsyShark]

Been looking at/thinking about pension planning.

Auto enrolment minimum contributions are 8% in total (plus 25% government top up).

On the assumption you start earning at 25 (allowing for university, time off to have children etc) minimum wage of £20.5k a year, you increase your contributions by an average of 3% a year you’ll be a pension millionaire by the current state pension age of 68.

Using the 4% rule that means you’ll be able to drawdown £40k a year, which adjusting for 43 years of inflation at 3% means a pension of £11.5k in today’s money.

I’m ignoring state pension as I think it will need a major overhaul, if it can still exist at all.

On the assumption I’ve got the sums right (big assumption) am I wrong in thinking the government should be looking to increase the legal minimum payments as soon as possible?

If so, what’s the best way to do this and how fast would be reasonable to do it? How high should the minimum contribution be?

The employer NI hike will lead to higher prices and job losses, squeezing people’s finances even more.

I’m concerned there’s a pensions time bomb looming for lots of people!

Your numbers are off. The 8% includes tax relief. Contributions only need to be paid above £6240 earning per year. Anybody earning under £10k does not need to be auto enrolled.
That’s not to say that you cannot put in more.

I worry about this! I save/invest heavily outside of my pension and am on track to be okay, but I did the maths with my DSis the other day (min wage working in care) and it's depressing how little she's on track to get after having worked so hard her whole life. If something does happen to the state pension she'll be screwed.

That being said, given we're in a cost of living crisis I don't think people on lower salaries would take kindly to a mandatory higher percentage. Many of DSis colleagues have opted out already as, despite the benefits in the future/compound interest etc, they just NEED the cash now.

I agree state pension as it current is, wont exist in 40 years. So onus is on individuals to save for the future.

And Yes i agree the 8% is too low. Prob should be closer to 12% minimum. But its a start, 20 years ago loads didnt do pension.

Fair point, but it’s based on minimum wage so still works as a rough guide.

Assuming by the time you retire, you own your home and any family have flown the nest, most people will be able to downsize a little.

A couple with an income of £23k plus a lump sum from downsizing should be ok. Think of your current budget minus mortgage, childcare, school /child costs, commuting and work wardrobe.

What I am saying is the 8% that is currently being paid by most employers and employees is not on the full earnings, whatever they may be.

Agree, there is also an upper limit of just over £50,000 so if you get tonthat point in your earnings your employer doesn't have to pay anything at all.

If they raise the minimum contributions, there's a risk that more people will opt out as unaffordable so there has to be a balance. You can always choose to pay in more. There's also the consideration re lifestyle expectations - most recommendations seem rather generous in the amount of money required.

I disagree with the expectation that there will be no state pension at all, it's likely there will always be something because pensioners vote and it's politically unattractive for pensioners to be in dire poverty.

Your sums are off re the NMW btw - from April it will be close to £24k for a 37.5 hour week.