DC saving levels risk retired living standards

DC saving levels risk retired living standards

Just 16 per cent of people saving into a defined contribution pension are putting away enough to maintain their standard of living in retirement, research commissioned by Aon has revealed.

The survey of 2,000 DC scheme members, conducted by YouGov, also found that around 30 per cent did not have any idea of what income they expected to receive in retirement.

Half of all respondents, meanwhile, said they did not expect to maintain their standard of living in retirement.

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Extrapolated out to the 8 million people saving into a DC scheme, that translated as 4 million savers who were in the dark over how much they would need in retirement. 

Aon stated this revealed a "clear lack of understanding", as well as an "enormous disconnect between scheme members’ current expectations and the reality of pension saving".

Despite the continued roll-out of auto-enrolment, the survey found that overall, combined employer and employee contributions rates as a percentage of pay had fallen to 12.7 per cent, down from 15 per cent.

Broken down individually, DC members were on average contributing £1,400 per year too little into their pensions - translating as an £11.4 billion DC savings gap per year.

Sophia Singleton, ‎partner and head of DC consulting at Aon Hewitt, said: “Auto-enrolment has successfully increased participation in pension schemes, but the vital next step is to ensure that these new entrants save a sufficient amount for retirement.

"It is crucial for employers and trustees to have the right structures in place to make retirement saving easier to understand, which would encourage employees to contribute more.”

The survey also revealed that people under 35 - known as millennials - were twice as likely as the over-55s to seek financial advice online.

Forty per cent of millennials believed they would retire by the age of 65, despite not receiving the state pension until at least age 68.

 The survey also found a conflicted attitude towards retirement products. While two thirds of respondents said they want a reliable income in retirement, 51 per cent said they did not want to be locked into annuity-style products.

The survey also showed there was continued reliance on the employer. Sixty-two per cent said their workplace pension would be one of their main sources of income in retirement, while 60 per cent of employees trust their employer’s guidance when considering where to save for a pension.

Ms Singleton said: "We still see that members look to their employers for guidance. The trust that is placed in them when it comes to pension savings, means that there is a real responsibility to provide adequate and clear communications in order to improve member engagement and contribution levels."

Aon's report came after the Department for Work and Pensions released its latest auto-enrolment projections, in which it predicted annual workplace pension contributions would hit £17bn by 2020. 

It also predicted opt-out rates would remain at around 9 per cent to that point, by which time members would be contributing at least 5 per cent of their income, and employers 3 per cent.