By Rob Barron

New research from the Scottish Widows suggests that whilst auto-enrolment has been a success, under 30s are not putting enough away to save for their future.

For the uninitiated, auto-enrolment was introduced as part of the Pension Act in 2008, and means that an employer must enrol staff into a workplace pension if they fit a range of criteria, including the following:

• Over the age of 22 
• Earn more than £10,000 

Once enrolled, employees have a month to decide whether to stay in, or opt out. If they choose to stay in the pension scheme, they effectively have three parties paying into the pot:

• Themselves 
• Their employer 
• The Government, in the form of tax relief 

Auto-enrolment has helped to get young people saving for the future. However, the low amounts that they are paying in could risk them having a shortfall when the time comes to retire. Simply put, the problem is that whilst the majority of people are in a pension, most aren’t paying enough.

Currently, 80% of 22-29 year olds are paying into a pension, but Scottish Widows estimates that 70% of them are not putting enough away.

How much should they be paying in?

According to the Scottish Widows 13th annual Retirement Report, the average contribution for under 30s is currently £184 per month. This puts them on track for an annual retirement income of £15,200 including the State Pension. Scottish Widows suggests that the minimum annual income required for a comfortable retirement is £23,000, giving an average shortfall of £7,800.

In order to achieve an annual retirement income of £23,000, a combined contribution, including employer and employer contribution of 12%, is recommended. However, the current minimum combined contributions are just 2%, and only rising to 8% by the start of the 2019/20 tax year.

Whilst the increase to the minimum contribution is intended to bridge this predicted shortfall, research suggests it may have an adverse effect, pushing up the opt out rate. When asked if the increase would make a difference to their saving habits, over half stated that they would no longer stay enrolled in their workplace pension.

Delays cause shortfall

Starting to save early for retirement has many benefits, the main one being that you aren’t playing catch-up with your monthly payments. For example, if somebody started saving into a pension at 25, they would need to put aside £293 per month to achieve an annual income of £23,000. However, if they delayed it, then they would need to put aside:

• £443 if starting at 35 
• £724 if starting at 45 
• £1,445 if starting at 55 

Catherine Stewart, Retirement Expert at Scottish Widows, commented: “There is no doubt auto-enrolment has been a success in kick-starting the savings habit for millions – but it is not a silver bullet. Auto-enrolment may well be lulling people into a false sense of security that they are putting away enough for a comfortable retirement. For many, that is simply not the case, particularly given retirement is looking more expensive than ever. With one in every 12 private rental sector tenants now a pensioner, ‘Generation Rent’ is headed for a more expensive retirement than previous generations. While retirement may feel like a long time away for those in their 20s, it’s really important they start to think about it as soon as possible. Using the right platforms, technology and content to engage young people in formats they appreciate is a critical first step. If we don’t get this right, then it is far more difficult for them to reach their desired savings levels in their 30s and 40s. What we know for sure is that younger people are far more likely to engage with technology and information that can be easily digested. So we have created a series of Pension Basics videos available on our YouTube channel and are currently developing a smart phone app enabling members of workplace pension schemes to keep track of how their savings are growing. Continued investment in digital innovation to help engage younger generations in their long-term savings will remain a key priority for Scottish Widows.”

Why aren’t young people saving enough?

Despite the risk of not earning enough of an income to maintain their lifestyle, over half of those surveyed claimed that they couldn’t afford to save properly for the long term because of other financial commitments, such as:

• Credit card debt 
• Mortgage payments or rent 
• Student loans 
• Car finance 
• Other loans 

With the average debt for this age group at over £20,000, coupled with the fact that 40% don’t think that they will ever be able to completely stop working, it is no wonder that saving for the future is such a struggle. High rents and large mortgage deposits also stand in the way of saving for retirement. According to Halifax, the average deposit for a first-time buyer is currently £33,000.

With Scottish Widows implementing a number of learning and awareness resources aimed at a younger audience, only time will tell whether the predicted pension shortfall for under 30s is an anomaly or the start of a deeper rooted problem.

A pension is a long-term investment. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.