Savers not topping up pensions due to income squeeze

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The insurance firm have calculated that, in total, the UK's workforce are losing £2 billion a year as a result of their failure to put away the maximum amount, which would be matched by their employers.

This failure means that approximately 3.2 million employees are losing out on the chance to receive an extra £650 a year in contributions, which when combined with tax relief would give them a retirement income of £22,500 rather than £19,050.

However, as with many warnings about not saving enough or about racking up too much debt, the main problem is not so much an unwillingness to save the maximum amount, but rather an inability brought about by the continued squeeze on incomes and living standards.

1 in 10

According to Royal London's research, only 10% of workers at many firms are making the maximum possible pension contributions.

Currently, the minimum is set at 1%, meaning that employees have to put 1% of their salary into their workplace pension, with this 1% being matched by their employers.

Yet many firms have a policy of matching additional employee contributions, often prepared to go as high as 9% of a worker's pay.

Unfortunately, despite such a willingness, Royal London report that the vast majority of employees don't take advantage of it, with Nationwide's own internal research also finding that 1 in 10 staff at the building society were contributing the maximum amount.

In Nationwide's case they actually changed their policy, making it mandatory for employees to make the maximum possible contribution.

However, in Royal London's case they handle pension policies on behalf of companies and therefore can't dictate whether or not employees have to pay maximum amounts.

Instead, they can only highlight the issue, and hope that pension savers listen.

Their Director of Policy, the former Pensions Minister Steve Webb, said, "When individuals are thinking about where to put their money to get the best return, the chance to more than double your money through an employer contribution and tax relief from the government takes a lot of beating".

No BOGOF for millions

There's certainly much to be said for taking advantage of employer contributions, especially in light of Royal London's estimations.

For example, their report found that a 40 year-old on average pay would benefit from an extra £3,500 in yearly retirement income, provided that they bumped up their pension contributions from 1% to 4%.

That's because their own contributions would not only be matched by their employers, but would also be eligible for tax relief, so long as they didn't exceed £40,000 a year.

As Steve Webb added, "Millions of workers are missing out on 'buy-one, get-one-free' money from their employer in the form of matching pension contributions".

Wages and living costs

And yet, even if a potential £2 billion is being lost each year because of the UK workforce's collective failure to contribute the maximum, it's likely that the reason for this isn't simply behavioural.

Instead, many workers are simply unable to save much more than the minimum amount due to the stagnation of wages and the increase in living costs that's currently affecting the UK.

This can be seen not simply in how inflation is overtaking wage growth (at 2.9% compared to 2.1%), but also in how saving rates have been falling in general throughout the UK, as households are forced to dip into their shrinking savings in order to pay rising bills.

It's also visible in rising levels of household debt, which the Bank of England have been warning about since the end of last year, and which are at their highest levels since the financial crisis.

As Frances O'Grady, the General Secretary of the Trades Union Congress said last month, "Credit cards and payday loans are helping to prop up household spending for now, but millions of families are running on empty."

Pipe dream?

It's in such a context of weakening salaries, dwindling savings and rising debt that Royal London's call for more employees to make use of employer contributions must be understood.

As a major insurance company, they're understandably trying to generate more business for themselves, yet this means they're partially blind to the many people who simply can't make the maximum possible contributions.

Indeed, even though Nationwide made maximum contributions compulsory for their employees, only 8 out of 10 ended up paying them, with the rest opting out.

Still, this doesn't change the fact that, if they can be afforded, then the maximum contributions certainly are a good idea, especially when other reports have warned that retirement risks being a "pipe dream" for many people working today.