Individuals in their 20s could miss out on a pension pot of nearly £650,000 if they decide to leave their auto-enrolment scheme before the minimum contributions increase, research from Fidelity has suggested.
Auto-enrolment minimum pension contributions are currently set at 2 per cent – 1 per cent each for employer and employee.
This will increase to 5 per cent today (6 April), with the employee paying 3 per cent. In 2019 it will increase again to 8 per cent, with the worker paying 5 per cent.
According to Fidelity’s calculations, a 25-year-old will have a total pension pot of £643,420 after the increase to 8 per cent in contributions, which is equivalent to an annual income of £22,520.
The provider’s analysis is based on a person aged 25 with a starting salary of £35,000, saving for 43 years to age 68.
Earnings increase at 3.75 per cent a year and investments grow at 5 per cent per year.Carolyn Jones, head of pensions product at Fidelity International, said: "As consumers see contributions into their pensions rise and their take home wage decrease, we must continue to make the case for why opting out is not in their best interests.
"But it’s not enough to just tell people and waggle your finger at everybody. You need to show them so we’ve crunched the numbers."
| Total Pension Pot | Personal Contribution | Estimated income from pot at retirement |
2% (Current AE duty) | £ 164,647 | £32,065 | £5,762 |
5% (Duty from April 2018) | £ 411,618 | £96,194 | £14,407 |
8% (Duty from April 2019) | £643,420 | £160,138 | £22,520 |
Ms Jones said: "They could lose out on the equivalent the basic state pension in annual retirement income if they opt out of all subsequent rises in contribution rates."
There are now more than nine million people auto-enrolled in a workplace pension scheme.
Ms Jones added: "As the state continues to tussle with the challenges of an ageing society, saving for retirement is no longer a ‘nice to have’. It is an essential part of financial planning.
"And for more vulnerable groups such as women, this is even more important. Women are more likely to be part time workers or have career breaks which can subsequently lead to smaller private pension pots. Any additional help they can get to boost savings should not be turned down.
"Opting out come April 2018 will see a loss of valuable employer contributions that, quite simply, cannot be found elsewhere. Any short term saving cost now will pale in comparison to the valuable benefits you could have had later."
maria.espadinha@ft.com
