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Automatic Enrolment Report 2: The benefits of automatic enrolment and workplace pensions for older workers
This is the second report in a series of research reports that investigate the potential impact of automatic enrolment into private pensions on individuals and their levels of pension saving but also on the shape of the private pension market. The report has been funded by Prudential, and uses data from the English Longitudinal Study of Ageing (ELSA) to calculate internal rates of return from pension contributions under automatic enrolment, based on household circumstances, and taking into account the likely effects of means-tested benefits and tax in retirement. The research series is being funded by a consortium or organisations including the Association of British Insurers, the Defined Contribution Investment Forum, the Department for Work and Pensions, the Institute and Faculty of Actuaries, Legal and General, The People’s Pension and Prudential.
Previous research has found that older workers could be at higher risk than younger workers of saving into a workplace pension not being suitable for them, particularly if they expect to be eligible for means-tested benefits in retirement. This report analyses the returns on pension contributions for those aged between 50 and State Pension Age (SPA) who do not opt out from their workplace pension after being automatically enrolled and tries to build a more comprehensive picture of which groups of older workers might be at risk.
Chapter one provides an overview of the policy context including the Budget 2014 changes to the tax regime, older workers’ position in respect of pension saving, likely retirement income, and behaviour in respect of automatic enrolment.
Chapter two outlines how returns from automatic enrolment are calculated and what affects the minimum level of return that is needed for automatic enrolment to be suitable for an older worker. This also considers factors, including eligibility for means-tested benefits, that could impact on the extent to which older workers might benefit from being automatically enrolled into a pension.
Chapter three examines some illustrative individuals to identify the key characteristics or circumstances of older workers that may cause them to have a higher or lower rate of return from staying automatically enrolled in a workplace pension.
Chapter four projects forward the population of older workers eligible for automatic enrolment to calculate household rates of return and identify the actual benefits from staying automatically enrolled. It presents some individuals and households that appear to be at high risk. Finally, it also presents new analysis on the likely size of pension pots of those reaching State Pension Age (SPA) over the next 10-15 years, including the pension pots that are expected to build up under automatic enrolment and any existing Defined Benefit (DB) and Defined Contribution (DC) pension provision.
Chapter five considers how individuals and households might be able to boost their rates of return from saving, and explores how the new flexibilities around DC pensions, announced by the Chancellor in Budget 2014, might affect individuals’ options for how to access their pensions at retirement. It also highlights some potential implications for the government, industry and employers on how to encourage older workers to save into a workplace pension.
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