Is the statutory minimum 5%+3% enough?

michaels

Various comment suggesting not nearly so I ran some numbers based on a simple model - employee works for 45 years with an 8% contribution.  Wages and state pension increase by 2% pa in real terms, invested pension money increases by 4% in real terms.  An annuity/SWR of 4.5% applies at retirement at state pension age.

In this scenario someone who starts on 25k and sees 2% real income rises and makes the 8% pension contribution will retire on 74% of their final real salary (DC plus state pension)

Start on 40k and the proportion is 56%.

Obviously the model is unrealistic in terms of income but seems to show that the lowest paid will have a retirement that is a decent proportion of their final income and that those earning more, while being under provisioned, will (a) not be destitute and (b) should in theory have more scope to contribute a higher proportion of their income.

JoeCrystal

The trouble is that most businesses will use the legal minimum, so in this case, you need to exclude £6,240 of the earnings first. Likely, auto-enrollment will eventually increase since it is still wholly too low, apply to the whole earnings and eventually be made compulsory. So how is your calculation assuming that only £18,760 or £33,760 of earnings into account. You should assume that there is no wage or state pension increase above inflation, which would make the model more pessimistic but far closer to what will happen.

For a large percentage of employees in the private sector before the auto-enrollment, the employer do not contribute anything at all so no point. (Technically, the employer offered a stakeholder scheme in 2001 if they employed at least five employees.) I vaguely remember that only four in ten employees working in the private sector on the eve of the auto-enrollment contribute into a pension scheme offered by their employer.

ewaste

Once you start looking at Qualifying Earnings on NMW and periods of under employment or unemployment over a typical lifetime. I also wouldn't assume any real terms wage or pension increases. 

I suppose it all depends upon the expectations of what AE will, should or could provide given different scenarios. 

My own opinion is that they are insufficient at present given the Defined Contribution nature of the system both in accumulation and decumulation. The lack of scale and risk sharing adds to the costs and funds required. There is also the argument for wider consideration of other aspects of saving and investing. 

Nebulous2

A lot of people at the bottom end of earnings will be under-employed.

Working in insecure jobs, zero hours contracts, with variable opportunities to work. 

A lot of them may be juggling essential bills and may opt out of being enrolled. 

I think you could be right that the minimum isn't as bad as some people, including me, assume,  but it is still in its early days. 

vacheron

Out of curiosity what projections did you use to calculate the total pension?

• Was this purchasing an annuity or drawdown
• Did the yearly private pension also factor in a 2% inflation increase each year?
• What life expectancy was presumed? (unless it was based on purchasing an annuity)?

I agree that a fully contributed UK new state pension does a lot of the heavy lifting for those retiring on lower salaries (especially a couple of similar ages with the full pension each). 

cfw1994

To survive on?
With that retirement at 67-68, with full SP, perhaps.
Big miss is suggesting they started on £40k…..very unlikely 👀

To live happily on?
If someone started on 40k, I would suggest their expectations are more than just surviving, & their desire to work until almost 70 may not be there 🤷‍♂️

Followed MSE advice to suggest our offspring try to get at least half their age in % terms.  Luckily they both got decent jobs where employers put way more than 5%, so I think they will be okay…..I am sure many of their generation won’t 🫣

OldScientist

michaels said:

Various comment suggesting not nearly so I ran some numbers based on a simple model - employee works for 45 years with an 8% contribution.  Wages and state pension increase by 2% pa in real terms, invested pension money increases by 4% in real terms.  An annuity/SWR of 4.5% applies at retirement at state pension age.

In this scenario someone who starts on 25k and sees 2% real income rises and makes the 8% pension contribution will retire on 74% of their final real salary (DC plus state pension)

Start on 40k and the proportion is 56%.

Obviously the model is unrealistic in terms of income but seems to show that the lowest paid will have a retirement that is a decent proportion of their final income and that those earning more, while being under provisioned, will (a) not be destitute and (b) should in theory have more scope to contribute a higher proportion of their income.

That's an interesting calculation, although some of your assumptions may be on the generous side in the worst cases. For example,
1) wages have barely kept up with inflation over the last decade (although the previous 3 decades were better)
2) Under the triple lock, the SP will tend to increase by inflation only (assuming wages continue to only inclrease by inflation).
3) 4% real for investments is a good median figure for a balanced portfolio, although some historical 45 year periods in the UK have seen returns as low as 2% real for a 60/40 portfolio (although for all equities this was 3%).

For those wanting a bit of further reading on the subject...

PLSA, Retirement income adequacy Generation by generation
PLSA, Hitting the target: A vision for retirement income adequacy
IFS, Challenges for the UK pension system: the case for a pensions review (Report 255)
IFA, Savings goals for retirement a series of papers linked at https://actuaries.org.uk/thought-leadership/thought-leadership-campaigns/savings-goals-for-retirement/

The last of those states

"Our analysis is based on the Pensions and Lifetime Savings Association’s Retirement Living Standards, which set out the cost of three distinct lifestyle levels of retirement: Minimum, Moderate, and Comfortable. We have identified three Savings Goals, linked to these three living standards:
1. People saving at the minimum level mandated by automatic enrolment, and with a full National Insurance record, should be on track to achieve the ‘Minimum’ retirement living standard.
2. Someone on average full time earnings will need to save around a quarter of their income (26%) to be on track to achieve the ‘Moderate’ retirement living standard.
3. Someone aiming to achieve the ‘Comfortable’ retirement living standard will need to save more than double what they’d need to save if aiming for ‘moderate."

Which is not far from your conclusion.

Marcon

Doesn't seem to be the conclusion the Institute for Fiscal Studies came to: https://ifs.org.uk/pensions-review

Albermarle

 Someone aiming to achieve the ‘Comfortable’ retirement living standard will need to save more than double what they’d need to save if aiming for ‘moderate."

So you need to save 52% of your income to get a comfortable retirement? That seems somewhat OTT.

Cobbler_tone

I think things will sort themselves out, unless we are suggesting that most 'kids' today are going to end up in extreme poverty. I guess it could happen as we all only have experience of two or three generations, although the trend does seem to be that the next generation(s) becomes wealthier. 

OldScientist

Albermarle said:

 Someone aiming to achieve the ‘Comfortable’ retirement living standard will need to save more than double what they’d need to save if aiming for ‘moderate."

So you need to save 52% of your income to get a comfortable retirement? That seems somewhat OTT.

For someone on average earnings (i.e., about £35k) the answer is yes (and remember 'comfortable' in PLSA living standards terms* is £43k per year for a single retiree and £59k for a couple). In other words, for those on average earnings, even meeting the 'moderate' standard (31k and 43k single and couple) would require a saving rate of 26%.

* I know there have been discussions on these boards in the past about the PLSA retirements nomenclature - IMO, minimum and moderate are probably OK as terms, but 'comfortable' is not since the antonym (i.e., 'uncomfortable' doesn't describe retirement for those on lower incomes).