With most people facing a retirement savings gap – how can employers help?

Three people climbing rocks by the sea

Thanks to auto enrolment, nearly 10 million more people are saving for their retirement – a huge achievement.

But, auto enrolment minimum contributions may not be enough for most people to be sure of a comfortable retirement. Unfortunately, this is likely to come as a bit of a surprise.

Research we conducted with auto enrolled savers revealed that over half (54%) have no idea what size pension pot they may have at retirement. But despite this, nearly a third (31%) thought they would have a financially comfortable retirement being able to drive a nice car and treat their family.

What can auto enrolled savers on minimum contributions expect?

We carried out some analysis based on average salaries for men and women, assuming 3% per annum investment growth, to examine what auto enrolled savers on minimum contributions might expect at retirement depending on when they start saving.

The calculations are based on contributions on every pound of earnings.

25 years olds retiring at 65
Fund sizeEstimated Monthly Retirement Income
35 year olds retiring at 65
Fund sizeEstimated Monthly Retirement Income
45 year olds retiring at 65
Fund sizeEstimated Monthly Retirement Income

While, on the face of it, these fund sizes look reasonable, with employees potentially facing up to thirty years in retirement, they are unlikely to provide most with a comfortable retirement. The illustrated monthly incomes are the best annuity rate available in the open market at 29/11/18 based on a 65 year old in good health living in Shoreditch, providing a level pension and a 50% spouse’s pension on first death, taking a 25% tax free cash sum at retirement.

What can employers do?

Helping employees understand what they might expect to have saved at retirement and the steps they can take to improve their retirement prospects is essential to help prevent a false sense of retirement security.

  1. Offer more than the minimum

As an employer, think about offering a more generous pension scheme. At NOW: Pensions we offer alternative contribution models that employers can choose beyond the auto enrolment minimum, that will make a difference to their employees’ futures. It can also really help with attracting and retaining top talent.

  1. Start early, save savvy

The sooner your employees start saving, the longer their money has to grow. Here’s a great video which explains the wonder that is compound interest. Employees are auto enrolled aged 22 but remind younger workers that they can opt in if they want to.

  1. Additional Voluntary Contributions (AVCs) add up

You’ve successfully enrolled your eligible employees into your workplace pension scheme and they are now actively contributing – great! They’re already on their way to funding their future retirement, but have they considered adding a bit more in? If your employees can afford to put in a little bit more, it can make a big difference. An extra £10 per month could grow into £13,000 over 40 years of saving. A good time to remind them about topping up their pension might be when they receive a pay rise or a promotion as they are less likely to miss money they’ve never had!

  1. It’s good to talk

Invite your pension provider or adviser to come in and speak to your staff about your workplace pension. Explaining face to face the benefits of pension saving and the steps they can take to improve their retirement prospects can really help improve understanding.

  1. Make sure employees know what they’re missing out on if they opt out

Opt-out rates for auto enrolment remain reassuringly low at 9%. But, for those tempted to opt out – especially as contributions rise – be sure to remind them that they’ll be missing out on free money from you and a tax top up from the government. 

Remember, employees that feel comfortable that they have prepared well for their eventual retirement will be less stressed and better motivated at work.