Why small changes now make a big difference later

Peter Crush

Last month something outwardly very small occurred that many people are predicting could make a big difference to people’s pension saving rates. On April 6th total contribution rates for those in auto-enrolment pensions rose from 2% of earnings (where employees and employers paid in 1% each), to 5% of earnings – where employees will now pay 3% and employers pay 2%.

The intention is very well meant. Government wanted to get workers used to the idea of saving, before steadily creeping contribution rates up to ensure they have meaningful pots by the time they retire. But the big difference this two-percentage point rise has got people talking about isn’t exactly a good one. There have been apocryphal forecasts predict people dumping their pensions en-mass and opting-out completely because the new increase will simply be too noticeable (adding, as it will, an additional £64 per month for someone earning £30,000 per year[1]). The Department for Work & Pensions itself predicts a 10% opt-out, rising to 21% by 2018/19, when the next planned increases some into effect. If true it would be a catastrophically bad direction for the hitherto successful auto-enrolment policy to go in.

But should this small percentage rise instead be looked at differently – in the sense that a small increase now could make an exponentially bigger difference later on? A certain high street supermarket has the phrase ‘every little counts’ – so is this what employees should really try to think about?

The short answer is yes. Early calculations already reveal the numerically small two percentage point rise employees will now need to swallow has a multiplier effect which is considerably larger in size, and could make it a far less bitter pill. They find that by adding just this extra few percent per year, the average earner (someone on £26,572 pa), could see their pension pot boosted by a whopping 30% when they eventually retire[2].

Put another way, if a worker who started their auto enrolment pension as soon as AE launched in 2012 continued contributing at the old rate, their pot would only be £30,000. By not opting out, and moving to the new minimum level, their pot could be £66,000 by the time they retired – in other words, they could double their pot – just from paying an extra 2% per year[3].

These startling figures don’t even include further increases to minimum contributions due to come into force in 2019 (where employee contributions rise by another 2%, to 5% of earnings in total). If followed again workers could create a new pot of around £101,000 for themselves by the time they retired. In other words, staff can build up a pot triple the size of what they would have accrued had they stayed on the original automatic enrolment contribution rates. It stands to reason too, that by opting out these sorts of accruals would not be possible at all.

With data already out there that suggests most people could easily save the sort of money this 2% rise represents (by switching energy suppliers; consolidating credit cards, cutting back on Starbucks/Costa coffees, bringing their own packed lunches etc.), the fact is this contribution rise needn’t make mass opt-outs as inevitable as some fear.

Of course, one of the simplest ways this doesn’t have to be inevitable is if people can actually see for themselves how a few percent here, or a few percent there can really change their pension pots over time. The only way employees will choose not to opt-out though is if they can understand this fact – by visually seeing how this two percent extra is small in the grand scheme of things now, but can work towards building something hefty in thirty-plus years time. Pension pot visualization tools do just this – they enable people to comprehend complex changes to accruals to themselves – for instance what contributing £50 a month more for 30 years can really turn into, or how automatically rising their contribution rates with pay rises can turn into serious extra money.

It’s worth remembering, pensions are still incredibly good value for money. Even after these rises, for every £100 saved into a pension through a workplace pension scheme, it only needs an employee contribution of £48 (less than half). But wouldn’t it be good if those doom-mongering predictions of mass opt-outs could be halted, just by applying some simple visual tools – ones that really show that small changes now provide much bigger benefits later?

[1] According to data by Hargreaves Lansdown

[2] According to research by Aviva – pension start date of age 22 retiring at 68, with annualized returns of 2.5% before inflation. See:

[3] The same Aviva statistics

2018-05-14T07:34:48+00:00 Blog|