Changing priorities for pensions
Over the years there have been many recommendations on the best route to take for your pension with a common perception that everyone should start young, to benefit from compound interest. The Institute for Fiscal Studies (IFS) may have changed this thought process. In a recent survey the IFS has called the government to nudge people to save more into pensions once their children have left home.
Pension savers are being encouraged to increase their contributions at different stages of life as their disposable income grows, typically because of pay rises, children leaving home and debts being paid off. Reinforcing this contention, current automatic enrolment into workplace pensions does not encourage contribution rates that increase with age.
The IFS research found that for a ‘typical’ graduate, with two children, their modelling indicates that the pension holders’ contributions should increase from around 5% of pay before the children leave home, to between 15 and 25% of salary once they do. This would result in increasing their pension contributions up to two thirds after the age of 45.
“Pension savers are being encouraged to increase their contributions at different stages of life as their disposable income grows”
The research encourages policy makers to take these emerging life cycle changes into consideration when it comes to pension contributions, focusing more on the effects of evolving lifestyle changes and their impact on personal financial life.
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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