Why it makes sense to increase pension saving as you get older

Most people need to save or invest for retirement if they want to maintain a similar standard of living when they are no longer working. But how much should you save, and when?

Messages about pension saving are often targeted at young people, but there are good reasons why the proportion of earnings set aside for retirement should increase substantially through working life for many people, says the Institute for Fiscal Studies (IFS).

In a new report, part of an ongoing programme of work funded by the Nuffield Foundation, the IFS argues that people should be encouraged to increase the amount they save as their earnings rise and their family circumstances change.

Many employees experience earnings growth over their lifetimes, and would therefore prefer to save more at older ages when earnings are higher, the think tank explained. Parents would also be expected to save more for retirement after their children have left home and expenses are lower.

Future adjustments to automatic enrolment or other policies to encourage retirement saving should carefully consider these issues, the IFS says.

Policy changes proposed in the report include default employee contribution rates that rise with age, increases in employee contribution rates that are triggered by earnings increases, and nudges to encourage individuals to increase their pension saving when their children leave home or when they finish repaying debts such as student loans or mortgages.

For a typical graduate with two children, 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. Following this pattern of saving would mean making two thirds of their pension contributions after the age of 45.

"There are good reasons why individuals should not want to save a constant share of their earnings for retirement over their entire working life," said Rowena Crawford, an associate director at the IFS and one of the authors of the report. "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."

"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," added Alex Beer, welfare programme head at the Nuffield Foundation. "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."