Pension savers should be nudged to increase their contributions at key life stages as they grow older, such as when they get a pay rise, when their children leave home, or when they have paid off their mortgage, an economic think-tank has urged.
Automatic enrolment into workplace pensions does not currently encourage contribution rates that increase with age, the Institute for Fiscal Studies (IFS) said.
But it argued that the focus should be on policies that increase retirement saving at the best time in people’s lives.
There are good reasons why the proportion of earnings set aside for retirement should increase substantially through working life for many people, the IFS said.
It added that many employees experience earnings growth over their lifetimes, and would therefore prefer to save more at older ages when earnings are higher.
Parents would also be expected to save more for retirement after their children have left home and expenses are lower.
The IFS said policies that should be considered include default employee contribution rates that rise with age and increases in employee contribution rates that are triggered by earnings increases.
There could also be nudges to encourage people to increase their pension saving when their children leave home or when they finish debt repayments such as student loans or mortgages, the IFS said.
The research is part of an ongoing programme of work funded by the Nuffield Foundation.
For a typical graduate with two children, IFS modelling suggests that they should increase their pension contributions from around 5% of pay before their children leave home to between 15% and 25% of pay after that.
This would mean making two-thirds of their pension contributions after the age of 45.
The IFS said a lack of flexibility in defined benefit (DB) pension schemes, which tend to be used more in the public sector, can lead to many young public sector workers saving more for retirement than they would ideally like to at that stage in their lives.
Rowena Crawford, an associate director at IFS and one of the authors of the report said: “There are good reasons why individuals should not want to save a constant share of their earnings for retirement over their entire working life.
“This does not make automatic enrolment, with its single default minimum contribution rate, a bad policy. But as policy makers consider how to increase retirement saving further, focus should be on policies that increase retirement saving at the best time in people’s lives rather than just increasing saving irrespective of their circumstances.
“Default minimum employee contributions to workplace pensions that rise with age are an obvious option. A smart, joined-up approach across Government could also involve employee pension contributions rising when an individual’s student loan repayments come to an end.”
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.”
A Department for Work and Pensions spokesman said: “Automatic enrolment has been an extraordinary success, with over 10 million workers enrolled into a workplace pension to date and an additional £22.7 billion per year being saved compared to 2012 among eligible employees.
“The Government’s ambition for the future of automatic enrolment will enable people to save more and to start saving earlier by abolishing the lower earnings limit for contributions and reducing the age for being automatically enrolled to 18 in the mid-2020s.
“Right now we’re delivering our plan to create and protect jobs to help people secure their financial stability today, helping them plan for tomorrow and the retirement they want.”