Pension saving 'nudge' at key moments could help employees save more for retirement

Building up your pension savings as much as possible can help you have a more comfortable retirement. But new research shows that many employees are missing opportunities to boost their contributions.

Neither big pay rises, nor paying off the mortgage, nor increased tax incentives result in employees increasing their retirement saving, the Institute for Fiscal Studies (IFS) found.

As these are times when people may find they have more disposable income, it makes sense to think about putting aside a little extra for retirement.

Pay rise

Fewer than 1 in 100 private sector employees actively decide to increase their pension contribution rate in response to a 10% pay rise. Even for employees who are nearing retirement, those aged 50-59, there is no relationship between increases in pay and changes in the proportion of their pay they choose to contribute to a pension.

This means that many older employees in particular are missing out on the chance to increase their retirement income at a point when their disposable income is likely to be high and spending commitments relatively low (with many having paid off their mortgage and/or no longer incurring expensive childcare costs), the IFS pointed out.

Mortgage freedom

The IFS study, funded by the Nuffield Foundation, also revealed that there is little evidence of people increasing their pension contribution rates by a significant amount when they pay off their mortgage. The average increase in pension contributions over the course of two years is not significantly different between those employees who have paid off their mortgage and those who continue to make mortgage repayments.

Children flying the nest

Similarly, adult children leaving home does not typically affect pension contributions -- despite this often being a point at which spending commitments fall. Yet there is evidence that some employees reduce their pension contribution rates after the arrival of a first child, when spending pressures increase.

Tax incentive

There is a bigger incentive to save into a pension when employees move into the higher tax bracket, because each pound saved in a pension saves 40p of income tax compared with just 20p for basic-rate taxpayers. Despite this, the IFS found no significant increase in pension participation or contribution rates among employees at the point when they become higher-rate taxpayers.

Interestingly, pension saving has become even less responsive to this tax incentive since the roll-out of automatic enrolment. This is thought to be because auto enrolment brought more 'passive savers' into workplace pension saving.

Policy 'nudge'

The report suggests a number of options for policymakers to nudge people towards saving more into their pensions, including a form of 'auto-escalation', with default pension contribution rates increasing when earnings rise or at older ages, and mortgage providers asking their customers in advance how much of their mortgage repayments they would like to divert into their pension when their mortgage term ends.

"Many employees might baulk at the idea of devoting more of their pay cheque to their pension in today's high-inflation environment. But when people do have extra cash available, either because of a pay rise, paying off their mortgage or their children leaving home, very few employees put any of this extra cash into their pension," said Laurence O'Brien, a research economist at IFS and co-author of the report.

"Given concerns that many private sector employees are at risk of undersaving for retirement, a natural question is whether changes to public policy could help them increase their pension saving when it makes more financial sense to do so."