DC pension pots set to increase by 30% due to AE contribution rise

Written by Natalie Tuck
02/03/2018

An average defined contribution pension pot could grow by 30 per cent as the minimum auto-enrolment contribution rises to 5 per cent in April.

According to analysis by Aviva, a person earning the average annual UK salary of £26,572 could add £840 to their pension pot over 18, up from £600 in 2017. Furthermore, this could add up to £36,000 more to their pension pot when they reach retirement.

Based on current contribution levels, an employee earning the average UK salary, who began saving into a workplace pension when auto-enrolment started in October 2012, could have a total of £30,000 in their pension fund at retirement. However, with increased minimum contributions of 5 per cent they could benefit from a £36,000 boost, more than doubling their total pension fund to £66,000 when they retire.

Auto-enrolment contribution rates are set to rise for the first time in April, up from 2 per cent, the original rate set when the policy was introduced in 2012. The new minimum rate of 5 per cent will see employees contribute 3 per cent of earnings, with the remaining 2 per cent coming from employers. There is also another planned increase to 8 per cent in 2019.

Aviva predicts that once 2019 contribution rate is implemented, the same saver could have a pot of £101,000 at retirement, representing an additional £35,000 in their pension pot and more than triple the amount they would have under current contribution levels.

Commenting, Aviva MD Corporate Andy Curran said: “Saving via a workplace pension is one of the rare times in life when doing nothing pays. Simply by remaining in their workplace pension scheme, savers can benefit from their employers topping up their savings and receive the added peace of mind that comes from knowing they are contributing to their long-term financial health. While the changes mean employees will also need to increase contributions from their own pay packet, making a small sacrifice now can add up to a big difference when it comes to retirement.

“Auto-enrolment has been an incredible force for good since its introduction in 2012 with more people than ever before now contributing on a monthly basis towards their retirement. It is vital the latest milestone is used as a basis on which to build further momentum around the need for people to save for retirement. If as a society we are to avoid a retirement savings crunch further down the line, we must go further still in the years to come.”

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