Today, Nest Insight, the public benefit research and innovation centre, publishes a new report on rates of retirement saving. Using new modelling of optimal savings rates, it argues that no single default rate of contribution into pensions will suit everyone – and points to the potential risks of increasing auto-enrolment contributions for lower earners. The report is further evidence of the need for a ‘whole life’ approach to financial wellbeing, in which pensions saving is considered alongside the financial wellbeing of households before retirement.
‘How Much is Enough?’, supported by Phoenix Insights, has looked at 30 modelled saver personas to identify what the right approach could be for people on different incomes. It finds that, while there does seem to be a case for raising the standard level of contributions for people earning around the national median, the picture is far less clear for those earning less than £2,000 per month. It is important that everyone has enough for a decent standard of living after retirement, but for these people, other savings structures, such as workplace emergency savings, could create an alternative way to balance financial security through their working life. The research also suggests that default rates for above-average earners should get them to a decent standard of living but should not be set too high, as many will have other sources of income that will make up a shortfall.
Since auto-enrolment into pensions was introduced in 2012, millions of people – including the 13 million members of the Nest scheme set up by government – are now saving for their retirement. Since the vast majority of people stick to the default pension contribution rates set in government policy, whatever is decided in the upcoming Pensions Review will define the savings rates of millions of people. Commonly accepted benchmarks focus on a given living standard in retirement but are generally silent on the implications of this for pre-retirement living standards. Today’s report brings this trade-off to life and highlights the massive diversity that exists between different people and households.
Matthew Blakstad, Director of Analysis and Governance at Nest Insight, said:
“Many people aren’t saving enough for a smooth transition into retirement – but household incomes vary hugely, and many people’s working incomes are already lower than living standard-based benchmarks. If default contribution rates into pensions are raised, people on lower incomes could face real trade-offs with current living standards. Our new modelling provides further evidence that financial security should be balanced both before and after retirement.
“The future for pensions auto enrolment should be considered alongside other measures to support households through their financial lives, such as workplace emergency savings. Nest Insight’s work shows that the financial health of households can be a building block for broader economic growth. People who have financial resilience today are more likely to save more for the future – and this in turn creates more investment in the broader economy, as well as reducing money-related mental health issues and sickness absence, and increasing productivity. We would like to see progress towards lifelong financial security for households, as part of a wider strategy for economic security and growth at the national level.”
Catherine Foot, Director of Phoenix Insights, which has partnered with Nest Insight to support this report, said:
“The long-standing question of ‘how much is enough’ for retirement can be complex. People’s lives vary hugely and the broad-brush approach to determining savings adequacy can often overlook the day-to-day experience of individual households. Age, sex, periods of non-earning, divorce, childcare responsibility and housing costs are just some of the many different characteristics and circumstances that influence household finances and consequently people’s ability to save. Millions of adults are unknowingly heading for retirement financially unprepared, so by understanding the factors that make the biggest differences to people’s saving ability, both policy-makers and individuals will be better equipped to take action to improve future retirement outcomes.”
ENDS
Notes to editors
Read the report: How much is enough? A contextual view of retirement savings (PDF)
About Nest Insight
Nest Insight is a public-benefit research and innovation centre. Our mission is to find ways to support people to be financially secure, both today and into retirement. We conduct rigorous, cutting-edge research, working collaboratively with industry and academic partners to understand the financial challenges facing low- and moderate-income households. We use these data-driven insights to identify and test practical, real-world solutions. Our findings are shared widely and freely so that people around the world can benefit from our work. For more information, visit nestinsight.org.uk
About our programme partner
Phoenix Insights is a think tank set up by Phoenix Group to transform the way society responds to the possibilities of longer lives. They use research to lead fresh debate and inspire the action needed to make better longer lives a reality for all of us. The core of their work is focused on financial security, work, and learning and skills. Reimagining longer lives means making changes in all these areas. At the heart of all of Phoenix Insight’s work, they are committed to reducing inequalities and building a society that enables all of us, not just the fortunate few, to live better longer lives. For more information, visit: thephoenixgroup.com/phoenix-insights
About Nest Insight’s strategic partner
BlackRock is a global investment manager serving the UK market for more than 30 years with a purpose to help more and more people experience financial wellbeing. BlackRock’s Emergency Savings Initiative is made possible through philanthropic support from the BlackRock Foundation and the BlackRock Charitable Gift Fund. The initiative brings together partner companies and non-profit financial health experts to make saving easier and more accessible for low- to moderate-income people across the US and UK, ultimately helping more people to establish an important financial safety net. For more information, visit blackrock.com/corporate/about-us/social-impact
