Confusion and apathy over pensions means workers risk not saving enough for retirement.
Despite receiving salary increases people are failing to increase the amount they put away.
“I know I’m not putting enough away but I have other priorities at this stage in my life,” said Adam, who is 26.
Adam's had pay rises over the past three years, but never increased the amount he's saving for retirement beyond the minimum 1%.
“I feel like at my age I should be enjoying myself – retirement seems a very long way off. I’m living in London and I choose to spend money on going out and socialising. I value my free time," he said.
The delay that could never be fixed
Over the past five years the average person has received two pay rises but half haven’t increased their pension contributions to match their higher income.
Research from pensions firm Fidelity shows the two reasons people did not increase their pension contributions were because the pay rise they received was only small, and they had other more immediate spending priorities.
However, the company found that a quarter of people said they simply didn’t think about it.
Adam isn't one of those, but even he has put off increasing his pension contributions.
“I know I need to take control of my own financial future – the way things are going I might never get a State Pension so I need to look after myself,” he said.
“I feel OK that I’ve started saving into a pension at a young age. I’ve taken the first step but I know there’s room for improvement. It’s at the back of my mind that I don’t want to be poor when I’m older.
“I’m sure a bit later on my priorities will change as my circumstances and responsibilities change.”
The problem is, the longer you wait, the harder it becomes to fix.
The scale of the problem
Workers contribute an average of 6% of their monthly salary into their pension. This increases to an average of 8% for higher earners with salaries above £60,000.
Meanwhile those earning up to £20,000 put away just 4%.
The pension industry rule of thumb suggests that we should be aiming to save half our age as a percentage of our salary to enjoy a reasonable lifestyle in retirement.
So, at 20 it should be 10%, at 25 around 12.5% and at age 40 around 20%.
One in five people have no idea how much they save each month and that increases to a quarter for those aged over 55.
This is particularly worrying as this group is the closest to retirement age.
Richard Parkin, head of pensions policy at Fidelity International, said: “The days of guaranteed pensions are largely gone. The retirement income of future generations will depend on how hard they’ve saved and how much their employer has helped them.
“You may have been automatically enrolled but don’t assume that means you’ll be saving enough for the retirement you want.”
More savers saving less
Auto enrolment into workplace pensions has done great things to get more people saving for later life but the levels of minimum contributions are way too low and could mean many will still struggle to make ends meet when they give up work.
Currently millions of workers are just putting away the minimum of 1% of their salary plus 1% from their boss. This goes up to a total of 5% (3% from staff and 2% from employers) in April 2018.
From April 2019 the minimum levels into workplace pensions go up to 8% (5% from staff and 3% from employers) which is still way too low.
Parkin added: “The minimum contributions under automatic enrolment will increase to 5% of earnings from employees and 3% for employers from April 2019. That means only £80 a year of savings for every £1,000 you earn.
“But the rules mean that the first £6,000 or so of earnings is ignored. That means somebody earning £10,000 a year would put away just £330 of contributions a year. That’s not going to go very far in retirement.
“Some employers will be offering more than the automatic enrolment minimums but many will not. This means that you’ll have to do more yourself to ensure a decent standard of living in retirement. That sounds daunting but it doesn’t need to be. By saving a little extra each year you can get to the level of pension savings you need.
“To avoid a big drop in the standard of living at retirement, somebody on average earnings of £26,500 today is likely to need around 65% to 70% of their salary as income in retirement. The State Pension on current terms will provide just under half of that but it may not be safe to rely on that.”
How to win at pensions
It is becoming vital that we take control of our own financial future.
Getting into the pensions saving habit is important. The younger you start the lower the amounts you can put away because over a working career they have years of compound interest to help them grow into a worthwhile sum.
But you need to keep an eye on what you put away, how your pot is growing and save as much as you can to ensure you are on track to have the cash to fund the lifestyle you want in retirement.
The art of pension saving is to squirrel away cash from your earnings to give you an income once you stop working – but you need to get your sums right.
