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What level of pension contribution is needed to obtain an adequate retirement income?

  • Daniel Redwood
  • Leandro N. Carrera
  • John Armstrong
  • Teemu Pennanen
Registered author(s):

    Under automatic enrolment, employers are required to automatically enrol their employees into a qualifying pension scheme. The minimum total contribution rate is 8% of a band of earnings from £5,668 and £41,450 per annum, of which a minimum 3% must come from the employer. With over 80% of Defined Benefit (DB) schemes now closed to new members or future accruals the majority of employers are expected to select a Defined Contribution (DC) pension as their qualifying scheme. This report analyses what ranges of retirement incomes from a DC pension different individuals might achieve by making only the minimum required level of contributions. The report also analyses the contribution rate necessary for different individuals to have a “good chance” of achieving an adequate retirement income. This report employs outputs from the PPI Individual Model adapted to use stochastic modelling techniques, based on a model developed by the Department of Mathematics at King’s College London. Each individual modelled is run 100,000 times with different economic scenarios. This illustrates better the variability around investment returns and economic variables year on year.

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    File URL: http://eprints.lse.ac.uk/54233/
    File Function: Open access version.
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    Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 54233.

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    Length: 57 pages
    Date of creation: Oct 2013
    Date of revision:
    Handle: RePEc:ehl:lserod:54233
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    Web page: http://www.lse.ac.uk/

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    1. John F. Cogan & Olivia S. Mitchell, 2003. "Perspectives from the President's Commission on Social Security Reform," Journal of Economic Perspectives, American Economic Association, vol. 17(2), pages 149-172, Spring.
    2. Richard Thaler & Shlomo Benartzi, 2004. "Save more tomorrow: Using behavioral economics to increase employee saving," Natural Field Experiments 00337, The Field Experiments Website.
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