Millions of pension savers facing affordability crisis to meet AE contributions

Workers on national average earnings will be contributing over 20 per cent of their disposable income under auto-enrolment by 2019, leaving millions of pension savers facing an affordability crisis.

In April, the first of the auto-enrolment contribution increases for employees will take effect, rising from 1% to 3%. A new report by independent researchers F&TRC has suggested the impact of this increase, and the subsequent increase from 3% to 5% in April 2019, will have a severe impact on consumer’s disposable income.

F&TRC’s Making Savings Affordable report showed this increase will result in the burden of contributions for employees increasing from 4% of their disposable income to 21%, a level that could be unsustainable for many. The firm said further action is therefore required if contributions are to be financially sustainable and not lead to increased opt-outs.

F&TRC is calling for pension providers and advisers to provide consumers with tools to help them budget more effectively, spend more wisely and save smarter so that the auto-enrolment contribution increases remain affordable and workers continue to save.

F&TRC director Ian McKenna said: “Auto-Enrolment has been very successful to date, especially in reaching low to middle income earners. However, as employee contributions are set to rise, our research shows that the burden it will place on the disposal income of the average UK employee could be too great for it to succeed without more work being done to help the workforce budget better.

“What we don’t want to see, after so much good work to date, is employees opting out, making them even less prepared for their future and throwing away the additional 4% they receive in employer contributions and tax relief. It is crucial that pensions and tech firms develop and deliver digital tools and services that will help consumers better manage their budgets in order to meet these increasing pension contributions and save for retirement.”

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