Saving 12% of salary towards a pension ‘would drain rainy day funds’

People’s rainy day funds could take a 10 per cent hit if they had to save more of their salary towards a pension, new research shows.

A jump in minimum pension savings under auto enrolment from 8 per cent to 12 per of salary could take chunks almost that large out of people’s surplus income at the end of every month and their net financial assets too, it found.

A 12 per cent pension saving target – split between individual, employer and Government contributions into pots – has widespread support among finance experts.

Auto enrolment: Employers are required to put a minimum of 3 per cent of earnings between £6,240 and £50,270 into staff pensions

A top industry body recently called for this to be phased in between 2025 and 2032, with employers’ contribution boosted to 6 per cent – though the Government would not be drawn on whether it would consider the plan.

The Association of British Insurers also floated allowing people to ‘opt down’ from 12 per cent, or ‘opt up’ from a 10 per cent minimum.

How much are people meant to save into pensions at present? 

Under auto enrolment, employers are required to put a minimum of 3 per cent of earnings between £6,240 and £50,270 into staff pensions. Tax relief from the Government provides another 1 per cent.

Workers must put in at least 4 per cent on their own behalf, and if they opt out all the above is lost.

Who pays what: Auto enrolment breakdown of minimum pension contributions for basic rate taxpayers at present

Who pays what: Auto enrolment breakdown of minimum pension contributions for basic rate taxpayers at present

Hargreaves Lansdown, which carried the impact study on people’s rainy day pots with forecasting firm Oxford Economics, says the pension saving minimum should not be increased further.

The financial services firm suggests its research shows any increase in long-term financial resilience from higher pension saving would be offset by a fall in short-term savings.

It is calling on the Government to look instead at how to get people to boost their contributions voluntarily when they are able to do so, including encouraging employers to match higher contributions if workers choose to pay in more.

How was the impact on rainy day savings modelled? 

The Hargreaves Saving and Resilience Barometer is compiled in partnership with the forecasting firm Oxford Economics.

It is based on data from the Wealth and Asset survey by the Office for National Statistics – which draws its information from 10,000 households – plus other data from official sources.

Hargreaves says the barometer is structured around five pillars of financial behaviour – controlling your debts, protecting your family, saving for a rainy day, planning for later life and investing to make more of your money.

The new study assumed any pension saving changes would be introduced at the beginning of 2025 when the current cost of living crisis and its fallout is likely to have ended. 

It analysed what impact the measures would have on people’s short-term savings and financial resilience by the end of 2029.

Many employers offer this already as a recruitment and staff retention incentive, and Hargreaves points to previous analysis showing six in 10 people might increase their pension contributions if such an arrangement were available.

This could be popular as people would only increase contributions as they need to, and rises in employer payments into pots would be targeted towards those who value them, according to Hargreaves.

‘Boosting pension saving is hugely important but cannot be tackled in a vacuum,’ says Helen Morrissey, senior pensions and retirement analyst at the firm.

‘Unless changes are timed carefully, we risk placing demands on people to save for tomorrow that risk undermining their financial position today.

‘If people are struggling with their day-to-day costs, then we risk any further boost in pension saving leading to people saving less and even building up debt.’

However, Hargreaves supports Government plans, announced in 2017 but not yet timetabled, to raise the minimum age for auto-enrolment from 18 to 22 and introduce pension saving from the first pound of earnings, if it waits until 2025 when current cost of living pressures and their after-effects are likely to have disappeared.

Its study found these measures would increase people’s long-term financial resilience by the end of 2029.

However, they would reduce people’s rainy day funds – three months’ salary worth of emergency savings – and their net financial assets, both by 3.3 per cent, and their surplus income at the end of every month by 3 per cent.

Morrissey says:  ‘The scenarios modelled by the barometer show the impact of the shift to 12 per cent minimum contributions to be much higher than the 2017 review reforms. 

‘They have the ability to really boost pensions but also have an immediate impact by eroding day to day surplus income and the ability longer term to build savings and other assets. 

‘People on lower incomes are particularly affected as are younger people who may find they can build bigger pensions but struggle to get on the housing ladder – we think a more nuanced approach needs to be taken.’


Should workers save 12% of salary into a pension, with employers stumping up half of it?

  • Yes 290 votes
  • No 63 votes

A Government spokesperson says: ‘We want to make sure changes are made in a way and at a time that is affordable, balancing the needs of savers, employers and taxpayers.

‘Automatic enrolment has succeeded in transforming pension saving, with more than 10.6million workers enrolled into a workplace pension to date and an additional £28 billion saved in 2020 compared to 2012.

“The Government’s ambition for the future of automatic enrolment will enable people to save more and to start saving earlier by abolishing the lower earnings limit for contributions and reducing the age for being automatically enrolled to 18 in the mid-2020s, benefiting younger people, low-paid and part-time workers as they will receive contributions from their employer from the first pound earned.’

What do YOU think of possible changes to pension saving rules?

This is Money readers voted 82 per cent in favour of the ABI proposal for workers to save 12 per cent of salary into a pension, with employers contributing half of it – see the poll above, which is still open.

We are now asking what readers think of plans to raise the minimum age for auto-enrolment from 18 to 22 and introduce pension saving from the first pound of earnings. Have your say below.


Should pension saving under auto enrolment kick in from the first pound of earnings?


Should the minimum age for pension auto-enrolment be raised from 18 to 22?