Auto-enrolment could leave workers with just half of what they need for a 'comfortable' retirement

The auto-enrolment pension scheme could leave new contributors with just half of what they need to retire comfortably in 40 years’ time, research claims.

The average pension saving through the auto-enrolment scheme will provide just £22,800 per year after tax for people entering the workforce today, according to comparison website Finder.

While it is better than the alternative of not saving into a pension at all, that amount would provide just 53 per cent of what they will need to lead a ‘comfortable’ retirement based on figures from the Pension and Lifetime Savings Association.

The PLSA’s latest figures indicate that retirees need £43,100 per year for a ‘comfortable’ standard of living, and £31,300 for a ‘moderate’ lifestyle.

A ‘comfortable’ retirement includes £500 per year for home improvements, £175 per week to spend on food, £1,500 per year in clothing costs, an annual two-week holiday in Europe, and £50 per birthday or Christmas present. The headline income figures do not include tax, housing or care costs.

Finder said that it based its figures on an employee contribution of five per cent – including pension tax relief from the Government – a three per cent employer contribution, annual growth of five per cent and fees of 0.75 per cent. The figures include the after-tax addition of the state pension.

George Sweeney, pensions expert at Finder, said that young people should consider paying more into their work pension when they can afford it, or even looking at a separate private pension alongside it.

‘When it comes to saving for retirement with your pension, there’s no such thing as too much or too soon. Auto-enrolment is a great start and gets people on the path towards a more abundant retirement, but it’s not a complete solution.

‘Our research shows that auto-enrolment is only half the battle, and if people want a comfortable retirement, they need to take ownership and responsibility for the other half.’

Women are set to be even worse off, with their pension covering just 46 per cent, less than £20,000 per year, of what is deemed a ‘comfortable’ income.

The comparison site said the average 22-year-old man is set to retire with a pension pot of £318,000 in today’s money by age 68, whereas women are projected to see their pension reach just £218,000.

Who pays what: Auto enrolment breakdown of minimum pension contributions for basic rate taxpayers at present. Contributions are based on a band of your earnings between £6,240 and £50,270, but some employers are more generous

Finder said the £100,000 divide between men and women, a result of the gender pay gap, means that men will see an average yearly pension of £25,300 compared to just £19,800 for women. That is after income from private pots is combined with the annual state pension.

The projected pension for women is just 63 per cent of what is needed for a ‘moderate’ lifestyle.

‘More discussions need to be had at home between partners. Ideally, leading to better planning around equalising contributions and seeing it as a joint effort – perhaps using additional tools like self-invested personal pensions (Sipps), especially if a woman is taking time out of work to care for children or family,’ George Sweeney said.

‘Hopefully as the gender pay gap closes, this will be less of an issue, but the reality is what it is, so couples and families need to work together and plan their finances as a team if they want a comfortable retirement.’

Couples who take a joint approach to pension saving can end up better off in retirement, though there are some snags – particularly regarding tax.

You should concentrate on maxing your own pension before trying to boost your partner’s, and there are circumstances where it makes financial sense to focus on the higher earner’s pension, say experts.

> How couples who save together can max out their pensions: Eight tips from the experts

What can you do to make up the difference?

‘To try and make up the difference, there are a few options. The first and most obvious is to try and maximise and increase contributions whenever possible. This doesn’t have to be done every month, even sporadic and infrequent increases in contributions – as early as possible – can make a huge difference in bridging the gap to comfort,’ Sweeney said.

He added: ‘Perhaps if you decide to stay in on a weekend and save some money, why not throw £20 into a pension (which will get an immediate boost of at least 20 per cent from tax relief, turning it to at least £24) and just do this whenever you get an opportunity.’

Sweeney suggests that any monthly payments you have that stop, or are reduced, such as mortgage payments, could then be redirected as pension contributions. This way, you won’t notice the difference to your budget, and will be making a noticeable difference to your pension pot.

Another option, he says, is to add the amount you will save in National Insurance contributions when they reduce on 6 April into your pension each month.

Again, you won’t notice the difference in your pay-packet from the months before the cuts came into effect, but this could equate to hundreds of pounds per year under the average salary.

Higher tax payers, meanwhile, can gain an extra 20 per cent in tax relief by filling out a self-assessment tax return each year.

Employers may also offer higher contributions if you up your own contribution. Whilst this does mean putting more of your own money into your pot, it is worth asking your employer, in order to make the most of the benefits on offer.