Young savers have taken liking to pensions
Four out of five younger people are saving into pensions and most are likely to stay put when contributions start going up next year, a survey reveals.
Three quarters of people aged 25-34 who have a pension also say they are willing to hike savings levels automatically in line with future pay rises.
Research shows most millennials are willing to throw in extra cash when they get pay rises
Auto-enrolment has led to a resurgence in pension saving over the past few years. but the Royal London research highlights its popularity among young people, despite financial pressures from housing costs and student loans.
Workers aged between 22 and state pension age and earning at least £10,000 a year from one job are now automatically signed up for a pension, unless they make an active move to opt out.
The total minimum auto-enrolment payment is currently 2 per cent of salary - split between contributions from individuals and employers and tax relief from the Government - although it's set to rise in stages to a total of 8 per cent by April 2019 (see the table below).
Royal London surveyed some 1,500 young savers and found 71 per cent had stayed opted in after being auto-enrolled into a pension, while a further 8 per cent had opted out but then joined later.
It also tested their reaction to planned future rises in savings rates, as the drop-out rate is widely expected to increase once contributions from individuals are upped from 0.8 per cent of salary now to 2.4 per cent in April 2018 and 4 per cent in April 2018.
However, Royal London found 74 per cent would continue to save if they were asked to pay in 2 per cent and their employer 3 per cent, making a total of 5 per cent of salary.
That fell to 62 per cent if the individual contribution was 5 per cent and the employer contribution was 3 per cent, totalling 8 per cent of salary.
However, young people were more amenable to the idea of an equal split, with 76 per cent saying they would continue to save if they had to put in 4 per cent and their employer also put in 4 per cent, totalling 8 per cent.
The figures Royal London floated do not exactly match future auto-enrolment increases, but the results suggest the majority of young people are likely to stick with pensions when they start having to hand over more of their wages every month.
They also point to people being more inclined to pay extra into pensions themselves if their employers are forced to throw more 'free' money into their retirement funds too.
|Your employer pays:||You pay:||The Government adds tax relief of||Total contribution|
|1.0% of your earnings until 6 April 2018 rising to 2.0% until 6 April 2019 then rising to 3.0%||0.8% of your qualifying earnings until 6 April 2018 rising to 2.4% until 6 April 2019 then rising to 4.0%||0.2% of your qualifying earnings until 6 April 2018 rising to 0.6% until 6 April 2019 then rising to 1.0%||2.0% of your qualifying earnings until 6 April 2018 rising to 5.0% until 6 April 2019 then rising to 8.0%|
Many employers already match more than the minimum contributions, and a previous Royal London study has encouraged workers to take full advantage of this perk if they can afford it.
The firm also found:
* Some 75 per cent of young savers with a pension intend to put part of any pay rise towards extra pension contributions, and 40 per cent plan to increase payments next year
* But 57 per cent said they knew they should be saving more into a pension
* And 28 per cent of those with a pension didn’t know how much they were currently contributing.
The Government is currently reviewing the auto-enrolment system to see if it can be extended to groups such as the self-employed and low-paid.
Royal London has recommended that mandatory pension contribution levels are increased beyond 8 per cent in total in future, and that people are 'nudged' to put money into their pensions when they get pay rises.
Jamie Clark, pensions business development manager at the firm, said: 'It's encouraging to see that auto-enrolment is welcomed by millennials and that the potential concern that many would opt-out when the increases come into effect next year appears to be unfounded.
'Increasing saving into a pension can seem daunting and difficult when there are other financial priorities and pressures. It’s great to see that automatic gradual increase in contributions, perhaps in line with pay rises, is potentially viewed by millennials as a way to help lessen the financial impact.'
Kate Smith, head of pensions at Aegon, said: 'It’s really heartening that the majority of millennials aren’t opting out of pension savings, particularly when set against the unique financial challenges many in this age group face when it comes to house prices, wage growth and student loans.
'It won’t be long before individual contributions towards auto-enrolled pensions start rising and there’s been some concern that this may challenge the so far successful take up of the scheme.
'The research suggests that this concern is largely unfounded and that young people see the benefit of paying into a pension and that they particularly like employer matching of contributions. This has the real opportunity of influencing UK pension saving behaviour.
'The only slight worry is that not enough people know how much they are paying into their pension. This is a side effect of the inertia principle on which auto-enrolment is based. If people haven’t actively made a decision about how much to pay in, then the chances are they won’t remember.'
Catherine Harford, 31, told Royal London she found it really tough to save for a pension initially, and she opted out of the scheme at her first job.
After moving jobs, the university admissions worker from Hertfordshire opted out again at first but then joined the pension scheme once she got a pay rise.
Catherine is now taking advantage of the option to increase pension contributions in line with her salary.
She said: 'I’d taken a pay cut to go to this new job so trying to save any money into the pension scheme when I started just wasn’t possible so I opted out.
'However, the following year I received an increase in my salary and the amount I contribute is in line with my step-up in salary so there was no"real" impact to my financial position. The money is taken from my salary before I have it and that really helps.
'I’m currently on maternity leave, but when I return to work I want to continue to contribute to my pension so I’m able to take advantage of the generous contributions made by my employer. It’s silly not to take advantage of this"free" money.'