The success of pensions auto-enrolment will depend on people understanding how much they need to save to ensure they can fund the retirement lifestyle they want, according to the Institute and Faculty of Actuaries.
Jane Curtis, immediate past president of the Profession, said this week’s introduction of the system, which could see up to 11 million workers automatically enrolled into a workplace pension, was a 'positive step' in efforts to encourage people to save for their retirement.
'However by effectively helping individuals to save without realising it there is the danger that they may sleepwalk into retirement without enough money in their pension pot to fund the lifestyles that they want to maintain when they leave work,' she said.
Outlining just how much of a drop in income people could see, Curtis noted that, under the National Employment Savings Trust (the default pension scheme employers can sign up to), the minimum total contribution made by employer and employee will be 8% a year by 2018.
A worker earning £20,000 a year and contributing 3% of their income over 20 years, while their employer contributes 5%, will receive a pension pot worth £47,000 in today's money.
This, Curtis explained, would amount to a tax free lump sum on retirement of £11,700 and an annual income for the rest of the worker's life of £1,600. Added to the current basic state pension of just below £6,000 a year, this would mean the worker faces a 65% reduction in their annual income when they reach retirement.
'Of course there are many factors that will affect the value of an individual's pension pot over time, but what these figures illustrate is that it is as important for each individual to be as engaged in saving for their future as it is to automatically enrol them into doing so,' she said.
'This is a communication and education challenge for both the government and employers and one where the expertise of the architects of pension products, such as actuaries, will have a key role to play.'