The Institute for Fiscal Studies has called on the government to nudge people to save more into their pensions later in their working life, when three conditions are met.
A study from the IFS, published today (May 10), said although the common message pushed by the industry is that individuals should start saving for retirement when they are young, there are good reasons why contributions should increase substantially throughout the working life.
In particular, the government should nudge people when their children leave home, mortgages are paid off or student loans come to an end.
It said many employees experience earnings growth over their lifetimes, and would prefer to save more at older ages when earnings are higher.
In addition, everyday costs are likely to decrease as children move out of the family home and people finish debt repayments such as student loans or mortgages.
IFS modelling suggests an average graduate with a student loan debt and two children should increase their pension contributions from around 5 per cent of pay before the children leave home to between 15 and 25 per cent of pay after that.
That would mean making two thirds of their pension contributions after the age of 45.
Its analysis also found that saving for retirement should be compressed into the years when children are not present in the household.
For example, the average individual should save around 13 per cent before the first child is born, nothing while there are two children in the household, and around 13 per cent again once both children have left the home.
For an individual with two children, the proportion of retirement saving done in the second half of their working life would then be 66 per cent, with 42 per cent of retirement wealth arising from contributions.
This compared with 47 per cent and 31 per cent for the average individual with no children.
Average saving rate for person with children
The IFS has also suggested that the government should look to introduce default employee contribution rates that rise with age and earnings as currently auto-enrolment does not encourage people to boost their pension savings as they age.
Rowena Crawford, an associate director at IFS and one of the authors of the report, said: “There are good reasons why individuals should not want to save a constant share of their earnings for retirement over their entire working life.
“This does not make automatic enrolment, with its single default minimum contribution rate, a bad policy. But as policy makers consider how to increase retirement saving further, focus should be on policies that increase retirement saving at the best time in people’s lives rather than just increasing saving irrespective of their circumstances.
“Default minimum employee contributions to workplace pensions that rise with age are an obvious option. A smart, joined up, approach across government could also involve employee pension contributions rising when an individual’s student loan repayments come to an end.”
But Steven Cameron, pensions director at Aegon, warned that leaving pension saving until later on in life risked leaving individuals short at retirement, particularly if earnings don’t rise and expenses don’t fall with age.
Cameron said while nudging individuals to consider contributing more to their pension at certain points across their life was a good idea, the wrong message must not be given to young savers.
He said: “We must avoid sending out any message suggesting it’s OK for younger workers to delay thinking about pensions until later in life.
“While retirement may seem far off for this group, it’s the contributions paid at younger ages which have longest to benefit from compound investment growth. It’s also risky to assume that earnings will necessarily rise or financial pressures disappear later on in life.
“Many younger people are taking longer to get on the housing ladder and having families at a later stage, which could mean their financial pressures could extend well into their 50s or even 60s. If earnings don’t rise and expenses don’t fall with age then reducing or delaying pension saving in youth risks individuals falling far short in retirement.”
amy.austin@ft.com
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