Auto-enrolment – the enemy of the younger generation?

29 June 2017

A new report1 has highlighted the problems the younger generation may face in terms of their future wealth. The world of Defined Contributions, as well as the introduction of auto-enrolment, has meant that people have many more choices to make with their pension. As Andy James, head of retirement planning at Tilney, explains, they are not necessarily making the right ones.

“The younger generation – basically anyone below 40 – seems to have a somewhat rose-tinted view about retirement. There are many people who are currently enjoying a comfortable retirement where they have the freedom, and the means, to travel and enjoy their later years.

“However, this is not necessarily a situation younger people will find themselves in. The slow disappearance of the Defined Benefit pension scheme means that people facing retirement further down the line will no longer have a guaranteed income they can expect in retirement. Instead, they need to be making some serious decisions now, before it is too late.

“We hear a lot in the press that overall pension contributions are at their highest level for very many years, if not all time. However, the average contribution has fallen from 9.6% of salary in 2012 to 3.9% in 2015. This fall means that the average pension contribution will in no way meet the needs of future retirees. And a big contributor to this is the birth of auto-enrolment.

“Since auto-enrolment came in, employers only have to pay 1% for every 1% an employee contributes. While it is great that this scheme has ‘forced’ employers to contribute to pensions who did not do so in the past, it also enabled some previously generous employers to reduce their contributions in line with basic auto-enrolment requirements for new joiners. This, and the overall averaging effect of the new lower contributions, has resulted in the average percentage being saved going down.

“This is a very serious problem with ominous implications. The average 30-year-old should be saving between 12-15% of their earnings into their pension if they want to have a comfortable retirement. But for many, the combination of graduate debt, rising inflation, rental costs and the difficulty getting a foot on the housing ladder, means this is not a realistic figure. The proposed increases in auto-enrolment contributions will be helpful but will not get anywhere near the required levels of contribution. However, saving just a few extra percent could make a huge difference. It is far more beneficial for younger people to save a couple of extra percent now, rather than increase their contributions by 10% when they are in their 50s.

“As always, you should consult your financial planner to ensure you are contributing as much as you can at every stage in your life to try to secure a comfortable retirement.”

 1 The Decision Citizens: Exploring the retirement challenges facing future generations, a report commissioned by Royal London

About Tilney

Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years.  Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.

We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.

Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.