Mortgage free Britons should be 'nudged' to increase pension contributions, finds report

But when children leave home, mortgages are paid off, or student loans come to an end, the Government should “nudge” people to save more into a pension scheme, it has been suggested. It comes following new modelling from the Institute for Fiscal Studies (IFS), with the report “When should individuals save for retirement?” Having been published today.

The IFS said automatic enrolment into workplace pensions does not currently encourage contribution rates that increase with age.

However, the IFS said future adjustments to automatic enrolment and other policies to encourage retirement saving “should carefully consider these issues”.

Examples of policies that the think-tank says should be considered include default employee contribution rates that rise with age, increases in employee contribution rates that are triggered by earnings increases, and “nudges” to encourage individuals to increase their pension saving when their children leave home or when they finish debt repayments such as student loans or mortgages.

The research, which has been published by the IFS today and is part of an ongoing programme of work funded by the Nuffield Foundation, uses an economic model to illustrate how people would be expected to change their saving rates over their life, in response to predictable factors.

Of course, the model is inevitability a simple approximation to real life.

However, it yields important conclusions with implications for the design of real-world policies, the IFS said.

The think tank said if employers make pension contributions only if people also save themselves, then employees would be expected to save throughout working life – but in low earning years only at the minimum amount required to get the employer contribution.

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Saving rates for retirement would still be expected to increase “dramatically” at older ages, the IFS said, particularly when expenses that are associated with children fall.

The IFS suggested graduates with student loans would be expected to increase retirement saving by the full amount of their previous loan repayments when loans are repaid or written off.

The modelling suggests, for a “typical” graduate with two children, they should increase pension contributions from around five percent of pay before the children leave home to between 15 percent and 25 percent after that.

It would mean making two thirds of their pension contributions after the age of 45.

The think tank said policy makers should carefully consider life cycle factors when developing future policies to increase retirement saving, adding that the focus should be on policies that increase retirement saving at the best time in people’s lives.

The report also highlighted a “downside” of defined benefit pension arrangements – in that contribution rates are set by the scheme rules and cannot be varied over working life.

This means they can’t be altered to suit an individual’s circumstances or the timing of their capacity to save.

Rowena Crawford, an Associate Director at IFS and one of the authors of the report, said: “There are good reasons why individuals should not want to save a constant share of their earnings for retirement over their entire working life.

“This does not make automatic enrolment, with its single default minimum contribution rate, a bad policy.

“But as policy makers consider how to increase retirement saving further, focus should be on policies that increase retirement saving at the best time in people’s lives rather than just increasing saving irrespective of their circumstances.

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“Default minimum employee contributions to workplace pensions that rise with age are an obvious option.

“A smart, joined up, approach across Government could also involve employee pension contributions rising when an individual’s student loan repayments come to an end.”

Alex Beer, Welfare Programme Head at the Nuffield Foundation said: “This important analysis demonstrates how people’s ability to save can change as they age, as their earnings grow, and as their family circumstances change.

“Policies to optimise pensions saving might therefore take a more holistic view of saving across the life course, to consider when and how to capitalise on opportunities to change the rate at which people save.”



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