Aviva, one the of the UK’s leading workplace pension providers, is calling for minimum auto-enrolment (AE) pension contributions to rise to 12.5% to give consumers a better chance of building up an adequate retirement savings pot.
The recommendation comes in Aviva’s auto-enrolment Pre-Review report (released 15th November 2016). Aviva believes the increase should be phased in so the new minimum rate of 12.5% is achieved by 2028. Aviva’s Pre-Review was carried out to help inform the Government’s own review next year.
Currently the minimum contribution rates for an AE pension are 1% of salary from the employer and 1% of salary from the employee (including tax relief). From April 2018 that will rise to 5% in total, with a minimum of 2% coming from the employer. Then from April 2019, this will rise to 8%, with a minimum of 3% coming from the employer. However, there is general agreement that an 8% overall contribution level is not enough to provide most people with a good level of income in retirement.
Aviva is also calling for Government to adopt a flat rate of tax relief, rebranded as a ‘savers’ bonus’. This would be set at 33%, or to improve consumer understanding and engagement, ‘save 2 get 1 free’ – so for every £2 someone saves into their pension they know the government will top it up with £1.
Aviva believes that raising the minimum AE contribution to 12.5% and simplifying tax relief would be a positive step towards helping more people save for their retirement.
Timeline to 12.5%
After 8% contributions are reached in 2019, Aviva proposes a freeze of four years, until 2023. This will allow time for the contribution level to embed, and mean advance preparation for the subsequent increases can take place.
Between 2023 and 2028 Aviva proposes employer and employee contributions could increase gradually towards 5% each. These contributions should be complemented by a ‘savers’ bonus’ (new system of tax relief) of 2.5% once the employer and employee contribution reaches a total of 10%.
Andy Briggs, Aviva UK and Ireland Life CEO, said:
“We’re living longer and healthier lives. But this creates a challenge - how do we support an ageing population? The British monarchy began the tradition of sending telegrams to centenarians in 1917, when King George V sent 24 telegrams. This year, the Queen will send over 10,000.
“By increasing the minimum auto-enrolment contributions, we can improve the retirement prospects of ordinary people. AE has already proved hugely successful, but there is no time for complacency as we still face the challenge of people not saving enough for their retirement. So we need to build on the success we’ve had so far.
“I know there will be challenges to increasing contributions, both for businesses and employees, but I believe the benefits would be significant. Increasing minimum pension contributions and introducing a simpler and fairer tax system for pensions would be an effective way of giving more people the chance of a decent retirement.”
Aviva’s 10 steps to AE success
Aviva’s AE pre-review report has made 10 recommendations to maintain and build on the success of the first four years of AE. The recommendations are:
1. Phase towards 12.5% contributions by 2028
2. Adopt a flat rate of tax relief – save 2 get 1 free – and rename as a ‘savers’ bonus’
3. Bring multiple job-holders into scope by combining their salaries to take them over the qualifying earning threshold
4. Explore options to extend AE to the self-employed
5. Remove the upper enrolment ceiling of the state pension age to encourage a longer working life
6. Officially encourage consolidation of small pension pots of £10,000 or less
7. Permit “without consent” transfers of contract-based workplace pensions, so long as savers are no worse off
8. Increase the eligibility threshold to £10,400 and lower the contribution threshold to £5,200 so that individuals can easily understand when they will be enrolled (once they earn more than £200 per week) and how much they will pay (contributions due on earnings over £100 per week)
9. Adopt Aviva’s three rules of thumb
- a. 40 year rule: Aim to begin saving at least 40 years before your target retirement date
- b. 12.5% rule: Aim to save at least 12.5% of your monthly salary towards your retirement
- c. 10 times rule: Aim to have saved at least 10-times your annual salary by the time you reach retirement age
10. Encourage the digitisation of pensions through government policy and regulation and a minimum level of digital functionality
“Auto-enrolment has been incredibly successful so far,” said Andy Briggs. “Over 250,000 employers have successfully implemented the system and more than six million new savers are now contributing to a workplace pension. Opt-out rates have remained stable with fewer than one in ten opting out1. When AE is fully rolled out, all employers in the UK will provide a workplace pension. Before AE, 86% of employers did not offer workplace pensions or held empty pension ‘shells’ with no members2.
“But pension saving is a long-term investment, so it needs a long-term plan. I believe that is what we have laid out here in our Pre-Review report.”
You can download the full report here
1Department for Work & Pensions Employer’s Pension Provision Survey 2015
2Making Auto-enrolment work – a review for the Department for Work & Pensions, October 2010
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If you are a journalist and would like further information, please contact:
Ben Moss in the Aviva Press Office
Landline: 0117 928 5843
Mobile: 07827 832 395
Email: ben.moss@aviva.com
Notes to editors:
• Aviva provides life insurance, general insurance, health insurance and asset management to 33 million customers, across 16 markets worldwide
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