Top up your pension every time you get a pay rise, says the IFS
Pension contribution rates should be automatically raised in line with pay rises, according to research which warns British savers are missing out on an important opportunity to boost their pension income.
According to the Fiscal Studies research institute, less than 1 percent of private employees increased their pension contributions as a result of the 10 percent wage increase.
Older workers with higher disposable incomes, who likely had lower spending obligations due to mortgage repayments or no longer had to bear childcare costs, were disadvantaged by not strengthening their pension funds.
“When people have extra cash, whether it’s a pay rise, a mortgage payment or children leaving home, very few employees put that extra money into their pensions,” said Laurence O’Brien, an economist at the institute. think tank.
High earners and empty nesters may find themselves in a situation with an increase in their pension contributions, since last year the workers received a larger than usual wage increase due to the increase in inflation.
In its report on Friday, the IFS said it had seen no significant increase in pension participation or contribution rates among those paying higher rates since auto-enrolment was introduced a decade ago.
The researchers also said there was little evidence that people changed their retirement savings at a certain “trigger age”. At the same time, they found a 0.4 percent increase in contributions when people switched from renting to a mortgage, and a 0.3 percent decrease for parents when their first child was born.
The IFS has proposed a higher minimum employee contribution for high earners, or an ‘automatic increase’ where default contribution rates rise in line with pay rises. They said it would encourage people to make better choices, which would help “equalize their standard of living throughout life”.
The proposals were welcomed by pension providers. Gail Izat, managing director of workplaces at Standard Life, said auto-enrolment showed that “inertia is a powerful force” and one way to do that was by automatically increasing contribution rates.
Mark Futcher, a partner at pensions consultancy Barnett Waddingham, said people should be saving 12 per cent of their annual income into their pension fund, and most were falling far short of that even with employer contributions.
“A large part of this is caused by the fact that employees remain at the level of contributions they paid when they started work, so if their salary increases, the amount of the contribution increases, but the percentage remains the same,” he said.
The IFS analyzed data from the annual working hours and earnings survey between 2005 and 2012 and 2019 and 2020. In both periods, it was observed that changes in earnings had a small effect on pension participation.
The think tank also found that high earners reacted only slightly to changes to the advance tax credit on pensions, with pension participation for those earning £60,000 falling by one percentage point in response to the cut from 40 per cent to 20 per cent.
“This research shows how much people’s retirement saving behavior is shaped by decisions made for them, not by them,” said Tim Gosling, head of policy at People’s Pension. He said attitudes were heavily influenced by auto-enrolment and the generosity of workplace pension schemes.
This month, the IFS said pension funds should be subject to inheritance tax and proposed new limits on tax-free lump sums, as it argued for measures such as easing National Insurance contributions on pension contributions in return for NICs on private pension income.
The think tank argued at the time that the proposals would favor the lowest earners and allow the Treasury to relax annual and lifetime allowances, which have been reduced since 2010.