Pensions ‘could be used to help workers build a rainy day savings pot’

The next decade of workplace pensions saving should be more flexible and help low earners to build up a savings safety net that they can draw on before they retire, according to a think tank.

The Resolution Foundation said more focus is needed on addressing the different challenges faced by low, middle and higher earners.

It said the first decade of automatic enrolment into workplace pensions has improved private pension coverage and boosted people’s savings pots.

But while a “one-size-fits-all” approach has worked well for the first chapter of auto-enrolment, the next chapter will require both a boost to saving rates and a more flexible approach, to reflect the different challenges that low, middle and higher earners face, it added.

The report argues that default contribution rates into auto-enrolment should continue to rise over the next decade, initially from 8% to 10%.

But it said the additional funds from this next phase of rising contribution rates should go into an easy-access “sidecar” savings account, with any balance more than £1,000 then flowing into an employee’s pension.

Its report said: “It is time to view pensions as part of a broader savings strategy designed to balance the twin objectives of retirement and precautionary saving rather than pitting them against one another.”

One in three working-age adults live in families with accessible savings of less than £1,000, the foundation, which is focused on improving the living standards of those on low-to-middle incomes, said.

The proposed saving boost and added flexibility would help low earners balance building up their rainy day savings while maintaining their current rate of pension saving – and also help higher earners, who are more likely to already have savings, to further boost their pension pots, the report argued.

Molly Broome, an economist at the Resolution Foundation, said: “Twenty years ago, and amid widespread concerns about poverty in later life, the Pensions Commission set benchmarks for how much people would need to save during their working lives to enjoy a decent income in retirement.

“Policies like the new state pension and auto-enrolment have delivered on their objective of giving everyone a decent minimum level of retirement income. But the job is incomplete.

“And so the new Government’s Pensions Review, which could set policy for the next decade, should focus on tackling the different savings challenges that low, middle and higher earners face.

“As well as continuing to boost pension saving, auto-enrolment also needs to be more flexible. It should allow low earners to build up rainy day savings that they can draw on before retirement, while higher contributions for higher earners could help them get closer to maintaining their level of living standards into retirement.”

The report was funded by People’s Partnership, provider of the People’s Pension.

Patrick Heath-Lay, chief executive of People’s Partnership, said: “For millions, the combination of legal minimum pension contributions and the state pension will totally determine their quality of life in retirement. Any conversation about the future of pensions saving needs to start with the question ‘how much is enough?’.”

A Department for Work and Pensions spokesman said: “Through our landmark pensions review, we are exploring options to expand on the success of automatic enrolment while boosting investment and increasing pension pots.

“More than 15 million pension savers could benefit from our new Pension Schemes Bill, with the potential for an average earner to have £11,000 more in their defined contribution pot by retirement when saving over a career.”