‘Employees need to make additional pension savings’
Auto-enrolment will increase the number of people saving for a pension but it will not give employees enough retirement income to live comfortably, advisers have warned.
Jon Dixon, corporate advice manager for AWD Chase de Vere, said employees risked “falling into the trap” of thinking auto-enrolment alone would provide a comfortable standard of living in retirement and fail to make other arrangements for saving.
He said: “I fully support the introduction of auto-enrolment. However specified contribution levels are such that those nearing retirement won’t have time to build up a significant pension fund whereas those with a longer time span face the prospect of muted investment returns, inflation eating into the spending power of their money and depressed annuity rates.”
For instance, AWD’s figures show that a 20 year old with a final pension fund of £439,114.20 would receive a final monthly income of £1170.97, which equates to £470.91 in today’s terms.
Mr Dixon said employees would have to make bigger contributions to their pensions and invest additional money into Isas to plug the income gap.
He said: “Employers should support their employees by making meaningful contributions, ensuring employees have access to good quality pension schemes with clear communications that make sense to them and ideally to independent financial advice.
“Auto-enrolment could provide a great foundation for people’s retirement planning, but it is unlikely to give them the standard of living they would want in retirement.”
Allan Maxwell, director of Glasgow-based Corporate Benefits Consulting, agreed there was a “big risk” employees would believe auto-enrolment could see them comfortably through retirement, particularly as most employers would not encourage staff to take financial advice.
He said the majority of employers he had spoken to plan to do the bare minimum to comply with auto-enrolment and were reluctant to offer financial advice on pensions.
Mr Maxwell said: “One employer I’m talking to is hesitant to appoint a financial adviser for his employees because if anything goes wrong he thinks he might get blamed. However other employers are more proactive in putting employees in touch with IFAs.
“Many employers still don’t understand what auto-enrolment is and the smaller ones just won’t communicate things as well as they should.”
His was worried that employees will see contributions as a “tax” and will not be willing to make additional savings, with the danger that they think they have got an adequate pension when in fact it would be insufficient.
Mr Maxwell added: “The message IFAs must convey when talking to employers and employees is that auto-enrolment is a good start, but probably not enough.”