The findings contradict the common idea that people should start saving at a young age and increase the amount as their incomes grow
The Institute for Fiscal Studies (IFS) has called the government to nudge people to save more into pensions when their children have left home.
A new IFS study indicates the best moments in life to increase retirement saving are after children leave home and when both the mortgage and student debt are repaid.
These findings contradict the common idea that people should start saving at a young age and gradually increase the amount as their incomes grow.
Although earnings tend to rise with age, costs associated with children and repaying debts do as well.
IFS modelling suggests a ‘typical’ graduate with two children should raise their pension contributions from around 5% of pay before the children leave home to between 15% and 25% of pay after that.
That would mean making two-thirds of their pension contributions after the age of 45.
The IFS also suggests the government should consider default employee contribution rates that rise with age and earnings.
These ideas are drawn from the observation that auto-enrolment does not currently encourage individuals to raise their contribution rates as they age.
This study also highlights that defined benefit pension arrangements cannot be modified over working life to fit an individual’s circumstances and 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 auto-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, she said.
She added: Default minimum employee contributions to 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.
Saving in the context of children is compressed into the years before their birth and the moment they leave home.
IFS analysis shows the average person should save around 13% before the birth of the first child, nothing after the birth of the second child, and 13% again once both children leave home.
For an individual with two children: the proportion of retirement saving done in the second half of working life and the proportion of retirement wealth from contributions peak at 66% and 42%.
These figures would be 47% and 31% for a childless individual.