The Institute for Fiscal Studies (IFS) has been analysing the adequacy of current pension contribution levels.
Automatic Enrolment: A Quiet Success of the 2010s
One of the key achievements of the 2010s was automatic enrolment into employee pension schemes. The first contributions under this system began in October 2012 during the coalition government. However, the idea originated earlier, driven by the Labour government’s Pensions Commission in 2002.
The Pensions Commission’s Groundbreaking Reports
The Pensions Commission released its first report in 2004. This report included two crucial tables:
- Earnings Replacement Rates:
The first table showed the percentage of earnings needed in retirement for different income bands. For instance, middle earners (£17,500–£24,999 in 2004) would require 67% of their income during retirement. - Private Pension Contributions:
The second table calculated the private pension contributions necessary at various ages to meet those targets. These estimates factored in the State Pension’s role.
These recommendations gained cross-party support. They demonstrated that it was possible to provide adequate retirement income affordably without relying on state funding.
Revisiting the Numbers 20 Years Later
In 2023, the Institute for Fiscal Studies (IFS) reassessed the Pensions Commission’s calculations. It updated the data based on current assumptions about:
- Investment returns before and after retirement.
- Changes in State Pension structure.
- Real (post-inflation) earnings growth.
- Future life expectancy projections.
Updated Insights for Today’s Workforce
The new calculations apply to a 22-year-old worker in 2023 who plans to retire at the State Pension age of 68 in 2069. These findings reflect how retirement planning has evolved over the past two decades.
The results are shown below, based on an individual aged 22 in 2023, retiring at State Pension age (currently set at 68 in 2069).
| Earnings level/ Replacement rate | 2004 | 2023 | ||
| Earnings | Contribution rate | Earnings | Contribution rate | |
| Low / 80% | £9.000 | 0.0% | £16,000 | 3.3% |
| Middle / 67% | £21,250 | 9.2% | £38,500 | 10.3% |
| High / 50% | £50,000 | 8.5% | £90,000 | 10.0% |
Source: IFS
These contribution rates apply to full earnings, unlike the current auto-enrolment rules which levied – at a minimum of 8% – only on earnings between £6,240 and £50,270. The message from the IFS table is one common among pension experts: auto-enrolment contributions alone are not enough.
The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested.
To discuss your financial planning, contact our Sheffield based Financial Advisers on 0114 212 4449 or info@smh.group
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