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Saving 12% of salary towards a pension ‘would drain rainy day funds’


People’s rainy day funds could take a ten per cent hit in the event that they had to save lots of more of their salary towards a pension, latest research shows.

A jump in minimum pension savings under auto enrolment from 8 per cent to 12 per of salary could take chunks almost that enormous out of individuals’s surplus income at the tip of each month and their net financial assets too, it found.

A 12 per cent pension saving goal – split between individual, employer and Government contributions into pots – has widespread support amongst finance experts.

Auto enrolment: Employers are required to place a minimum of three per cent of earnings between £6,240 and £50,270 into staff pensions

A top industry body recently called for this to be phased in between 2025 and 2032, with employers’ contribution boosted to six per cent – though the Government wouldn’t be drawn on whether it could consider the plan.

The Association of British Insurers also floated allowing people to ‘opt down’ from 12 per cent, or ‘opt up’ from a ten per cent minimum.

How much are people meant to save lots of into pensions at present? 

Under auto enrolment, employers are required to place a minimum of three per cent of earnings between £6,240 and £50,270 into staff pensions. Tax relief from the Government provides one other 1 per cent.

Employees must put in a minimum of 4 per cent on their very own behalf, and in the event that they opt out all of the above is lost.

Who pays what: Auto enrolment breakdown of minimum pension contributions for basic rate taxpayers at present

Who pays what: Auto enrolment breakdown of minimum pension contributions for basic rate taxpayers at present

Hargreaves Lansdown, which carried the impact study on people’s rainy day pots with forecasting firm Oxford Economics, says the pension saving minimum shouldn’t be increased further.

The financial services firm suggests its research shows any increase in long-term financial resilience from higher pension saving could be offset by a fall in short-term savings.

It is asking on the Government to look as a substitute at learn how to get people to spice up their contributions voluntarily when they can accomplish that, including encouraging employers to match higher contributions if employees decide to pay in additional.

How was the impact on rainy day savings modelled? 

The Hargreaves Saving and Resilience Barometer is compiled in partnership with the forecasting firm Oxford Economics.

It relies on data from the Wealth and Asset survey by the Office for National Statistics – which attracts its information from 10,000 households – plus other data from official sources.

Hargreaves says the barometer is structured around five pillars of economic behaviour – controlling your debts, protecting your loved ones, saving for a rainy day, planning for later life and investing to make more of your money.

The brand new study assumed any pension saving changes could be introduced initially of 2025 when the present cost of living crisis and its fallout is more likely to have ended. 

It analysed what impact the measures would have on people’s short-term savings and financial resilience by the tip of 2029.

Many employers offer this already as a recruitment and staff retention incentive, and Hargreaves points to previous evaluation showing six in 10 people might increase their pension contributions if such an arrangement were available.

This might be popular as people would only increase contributions as they should, and rises in employer payments into pots could be targeted towards those that value them, based on Hargreaves.

‘Boosting pension saving is hugely vital but can’t be tackled in a vacuum,’ says Helen Morrissey, senior pensions and retirement analyst on the firm.

‘Unless changes are timed fastidiously, we risk placing demands on people to save lots of for tomorrow that risk undermining their financial position today.

‘If individuals are scuffling with their day-to-day costs, then we risk any further boost in pension saving resulting in people saving less and even increase debt.’

Nonetheless, Hargreaves supports Government plans, announced in 2017 but not yet timetabled, to boost the minimum age for auto-enrolment from 18 to 22 and introduce pension saving from the primary pound of earnings, if it waits until 2025 when current cost of living pressures and their after-effects are more likely to have disappeared.

Its study found these measures would increase people’s long-term financial resilience by the tip of 2029.

Nonetheless, they would scale back people’s rainy day funds – three months’ salary value of emergency savings – and their net financial assets, each by 3.3 per cent, and their surplus income at the tip of each month by 3 per cent.

Morrissey says:  ‘The scenarios modelled by the barometer show the impact of the shift to 12 per cent minimum contributions to be much higher than the 2017 review reforms. 

‘They’ve the power to actually boost pensions but in addition have a right away impact by eroding each day surplus income and the power long run to construct savings and other assets. 

‘People on lower incomes are particularly affected as are younger individuals who may find they’ll construct larger pensions but struggle to get on the housing ladder – we expect a more nuanced approach must be taken.’


Should employees save 12% of salary right into a pension, with employers stumping up half of it?

  • Yes 291 votes
  • No 63 votes

A Government spokesperson says: ‘We would like to make sure that changes are made in a way and at a time that’s reasonably priced, balancing the needs of savers, employers and taxpayers.

‘Automatic enrolment has succeeded in transforming pension saving, with greater than 10.6million employees enrolled right into a workplace pension thus far and a further £28 billion saved in 2020 in comparison with 2012.

“The Government’s ambition for the longer term of automatic enrolment will enable people to save lots of more and to start out saving earlier by abolishing the lower earnings limit for contributions and reducing the age for being routinely enrolled to 18 within the mid-2020s, benefiting younger people, low-paid and part-time employees as they may receive contributions from their employer from the primary pound earned.’

What do YOU consider possible changes to pension saving rules?

That is Money readers voted 82 per cent in favour of the ABI proposal for employees to save lots of 12 per cent of salary right into a pension, with employers contributing half of it – see the poll above, which remains to be open.

We at the moment are asking what readers consider plans to boost the minimum age for auto-enrolment from 18 to 22 and introduce pension saving from the primary pound of earnings. Have your say below.


Should pension saving under auto enrolment kick in from the primary pound of earnings?


Should the minimum age for pension auto-enrolment be raised from 18 to 22?

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