The aim of most people saving for retirement is to try and achieve a comparable standard of living in retirement to when they are working.

The subject of how much to save has been widely discussed and researched, but the answer still remains largely subjective and depends on circumstances.

Another important consideration should be when to increase pension contributions.

To date, this subject has been given much less focus. However, The Institute of Fiscal Studies (IFS) has now looked into how pension saving might change over time for employees.

For employees aged between 22 and state pension age who earn 10,000 or more a year, the norm is to save into an auto-enrolment workplace pension.

However, this does not cover the self-employed, who must arrange their own private pensions or alternative investments.

Key findings

The IFS found that most people earn more as they get older and more experienced. However, for the majority of parents, the costs of raising children causes them to delay retirement saving until those expenses reduce, such as when their children leave home.

Since the introduction of auto-enrolment in October 2012, employees have been encouraged to save throughout their working lives, with incentives such as employer contributions and tax reliefs.

If the uncertainty about the future path of earnings could be mitigated, then more people would be likely to start saving earlier. However, the same pattern of increasing contributions later in life, particularly when children leave home, would remain.

Another solution could be for graduates with student loans automatically increasing contributions by the amount of their loan repayments once the loan was fully repaid.

Defined-benefit pensions

Many believe that a defined-benefit (also known as 'final salary', based on salary and years worked for an employer) pension is a solution, ensuring retirees have a decent income in retirement. However, the IFS report highlights an important downside of these defined-benefit schemes: contribution rates are set by the scheme rules and cannot be changed to suit the circumstances of the individuals, such as their capacity to save.

This lack of flexibility is an often-overlooked drawback of public-sector pensions, which, said the IFS, likely results in many younger public-sector workers saving more for their retirement than they would choose to.

The future of auto-enrolment

Rumours continue to circulate about possible changes to auto-enrolment, such as lowering the age (from 22 to 18) at which an employee qualifies for a defined-contribution workplace pension, or for the scheme to be extended to the self-employed.

However, the IFS wants policymakers to carefully consider life cycle factors when shaping future policies, arguing that the focus should be on increasing retirement saving at the most appropriate times in people's lives.

Rowena Crawford, an Associate Director at IFS and one of the authors of the report, said:

"As policymakers 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 into 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."

Mark Hodson, Associate Director at Omnium Employee Benefits, commented:

“In the USA, the idea of increasing contributions with age has existed for some time and has proved popular under the slogan, “Save More Tomorrow”.

“As a very broad rule, an individual should contribute half of their age as a percentage of their income into a workplace pension.

“This is easy to say but, often impractical; most people simply do not have enough spare money each month. The best thing you can do is increase your contribution to as much as you can reasonably afford. Once you do so, you will get used to it and your older self will thank you in the years to come.”

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