The government should nudge people to save more into their pensions at key milestones in their lives, according to research from the Institute of Fiscal Studies (IFS).

The organisation said future adjustments to automatic enrolment or other policies to encourage retirement saving should carefully consider urging contribution rates to increase with age or earnings increases, as well as encouragement for people to up their contributions when their children leave home or when student loans and mortgages have been repaid.

Modelling how workers could be expected to respond to predictable life events, the research noted that a ‘typical’ graduate with two children should increase their pension contributions from around 5 per cent of pay before the children leave home to between 15 and 25 per cent of pay after that.

The research added that it had highlighted a downside of defined benefit schemes, noting that these did not allow member contributions to be changed over the course of a member’s working life to suit an individual’s circumstances or the timing of their capacity to save.

IFS associate director, Rowena Crawford, said: “There are good reasons why individuals should not want to save a constant share of their earnings for retirement over their entire working life. This does not make automatic enrolment, with its single default minimum contribution rate, a bad policy.

“But as policy makers 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.”

Royal London director of policy and external affairs, Jamie Jenkins, said: “Such proposals have merit and resonate with the success we’ve seen where ‘save more tomorrow’ schemes are deployed in workplace pensions.

“The first priority must be to implement the proposals from the 2017 review as soon as we are comfortable that employers and employees have recovered their finances from the pandemic.”

However, Aegon pensions director, Steven Cameron, cautioned against “sending out any message suggesting it’s OK for younger workers to delay thinking about pensions until later in life”.

He explained: “While retirement may seem far off for this group, it’s the contributions paid at younger ages which have longest to benefit from compound investment growth. It’s also risky to assume that earnings will necessarily rise or financial pressures disappear later on in life.

“Many younger people are taking longer to get on the housing ladder and having families at a later stage, which could mean their financial pressures could extend well into their 50s or even 60s. If earnings don’t rise and expenses don’t fall with age then reducing or delaying pension saving in youth risks individual falling far short in retirement.”

Cameron noted that Aegon research had shown that a 22-year-old employee earning £22,000 could build a pension fund of around £145,000 in today’s money terms by age 67 at the auto-enrolment minimum level of 8 per cent, while someone who started saving on this wage at 35 would need a total contribution rate of 14 per cent.

He concluded: “What’s more, for most people, simply paying the auto-enrolment minimum of 5 per cent with a 3 per cent employer contribution will still fall far short of maintaining their lifestyle in retirement.”

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