The vast majority (95%) of older workers are likely to receive good value on their pension contributions if they stay in a workplace pension scheme after being auto-enrolled, according to a report by the Pensions Policy Institute (PPI).
The benefits of automatic-enrolment and workplace pensions for older workers, which was funded by Prudential, used data from the English Longitudinal Study of Ageing to calculate internal rates of return from pension contributions under auto-enrolment, based on household circumstances, and taking into account the likely effects of means-tested benefits and tax in retirement.
It analysed the returns on pension contributions for those aged between 50 and the state pension age (SPA) who do not opt out from their workplace pension after being auto-enrolled.
But the report also found that a very small group (3%) of those aged between 50 and the state pension age, and auto-enrolled, are likely to be at high risk of auto-enrolment not being suitable for them, assuming that they do not opt out.
These are generally older workers who are auto-enrolled and who then become eligible for guarantee credit in retirement because of the low income of their partner.
For those couples eligible for guarantee credit, currently set at £226.50 per week for couples, staying in a pension scheme after being auto-enrolled and increasing their private pension income by £1 leads to a £1 reduction in benefit entitlement in later life, unless they can save enough in their workplace pension to lift them above the means-tested thresholds.
Mel Duffield (pictured), deputy director of the Pensions Policy Institute, said: “The analysis shows that, despite the higher opt-out rates of around 15% seen among older workers, staying in a workplace pension is likely to deliver a very good return on their own pension contributions for the vast majority of this group.
“Even so, the pension pots being built up by older workers under automatic-enrolment, and particularly by lower earners, are expected to be relatively small.
“An average 51 year old, who was eligible to be automatically enrolled in 2012 and who only makes the minimum level of contributions, will have built up a pension pot of around £13,000 by the time they reach state pension age.
“The analysis finds that, under reasonable assumptions, around 90% of the pension pots built up under automatic-enrolment by older workers saving into a pension for the first time would have been below the existing trivial commutation limits.
“This would have given those savers the flexibility to take their pension as a lump sum at retirement and reduce interactions with means-tested benefits, boosting their rates of return on pension saving.
“Following the announcement in the Budget 2014, from April 2015, all older workers should be able to use these flexibilities, irrespective of the size of their pension pot from automatic enrolment and any existing pension savings.
“Individuals will, however, require support and guidance to ensure that they can access their pension in a way that delivers a good return on saving, while meeting their income needs at different stages during their retirement.”
Steve Webb, pensions minister, said: “The new freedoms announced in the last Budget have made pension saving more attractive for people of all ages.
“Even those relatively near retirement can stay in a workplace pension, benefiting from an employer contribution and tax relief, knowing that any pension pot they build up can be taken in full in cash when they wish.
“This is likely to boost take-up rates of automatic-enrolment pensions still further beyond their existing high levels.”
