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Auto-enrolment reforms could boost average DC pot size 32%

Piggy-Bank-Savings-UK-700x450.jpgSome defined contribution pots could be boosted by 32 per cent to £146,000 if two proposed reforms to auto-enrolment go ahead, according to research from the Pensions Policy Institute.

In a paper published yesterday the Pensions Policy Institute says lowering the age at which people can save from 22 to 18 and the removal of the lower limit on contributions would benefit many savers.

These reforms are expected to be implemented in the “mid-2020s” according to the Government.

As it currently stands a 22-year-old median-earning man in 2017 may be able to achieve a pension fund of £108,000 under minimum auto-enrolment contributions.

However, a median-earning 18-year-old auto-enrolled under last year’s review recommendations could achieve a fund of £146,000 at their state pension age, which is 32 per cent higher than under the current policy.

But the authors of the paper warn this is based on the assumption that someone has worked and saved for 50 continuous years from 18 to 68.

PPI director Chris Curry says: “The bigger impact on increasing a person’s contributions is not lowering the age at which they can save but the first pound that they can save. This is what will increase median earnings.

“However, lowering the age at which people can start saving is important in terms of the message it sends about saving at an earlier age generally. Millennials will be the full beneficiaries of auto-enrolment.”

Millennials now make up around 40 per cent of the target group for auto-enrolment, which has almost doubled the participation of 22 to 29 year olds in pension schemes.

Standard Life head of pensions strategy Jamie Jenkins adds: “We want to start a conversation about what people can expect from workplace pensions. We want the industry to start talking about how people can be encouraged to make higher contributions instead of how we enroll them.

“We stand on the second cusp of the giant nudge experiment and all this would be undone if everybody opted out over the next few years.”

Contribution rates are due to go up to five per cent of salary in April and eight per cent of salary in April 2019.

Curry and Jenkins both served as chairman of the Department for Work and Pensions’s expert advisory group for the 2017 review into auto-enrolment.

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Comments

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  1. Wow. 4 years additional contributions and investment return adds up? The power of compound interest? Not a difficult bit of modelling that. Very value added. However, if it gets the conversation started it will be welcomed by all. How to engage young people in saving is the challenge, but it really starts with education at school, which no-one seems willing to challenge.

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