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By Niki Cleal | Published Apr 27, 2012

Making the most of pensions

The Government estimates that around 7m people are not saving enough for their retirement and it has introduced legislation to require employers to auto-enrol their employees into private pension saving from October 2012.

This landmark reform is likely to bring many millions of people into private pension saving for the first time. The vast majority of these savers will be auto-enrolled into some form of defined contribution pension scheme.

The Pensions Policy Institute was commissioned by the National Association of Pension Funds to explore the impact that choices made by employers and employees could have on the future private pension incomes of individuals who save in workplace DC pensions. This article gives an overview of the key findings of the research. The full research report is available to download on the PPI’s website at www.pensionspolicyinstitute.org.uk.

Which choices made by employees and employers can affect future levels of private pension income?

The research aimed to explore the potential impact that a range of choices made by employees and employers could have on the final private pension income that an individual might expect to receive in the future.

Some choices are likely to lead to higher private pension incomes in the future. The research considered the positive impact that making additional pension contributions, delaying retirement, shopping around for the best rate on an annuity, being in a low-charge scheme or not taking a tax free lump-sum can have on the final level of private pension income. Equally other choices can lead to a reduced private pension income. The research considered the negative impact of opting out of pension saving for 10 years, of being in a high-charge scheme, receiving a poor annuity rate or retiring two years early.

It is important to note that the research is stylised to the extent that we only examined a particular set of choices. In reality employees and employers may make different choices and individuals with different earnings levels would be affected in a different way. Nevertheless the intention was to look at which choices made by employees and employers had the biggest impact on the potential future levels of private pension income for a median-earning man.

The research considered the choices and factors for a median-earning man:

• Saving a total of 12 per cent of band earnings – between £5715 and £38,185 in 2010/2011– rather than the minimum 8 per cent of band earnings required under auto-enrolment, has the biggest positive impact and can increase private pension income by 50 per cent.

• Retiring two years after state pension age and continuing to save in that time has a positive two-fold effect through saving more and deferring annuity purchase and can enhance private pension income by 20 per cent.

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