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For almost nine years, pension auto-enrolment has helped millions of Brits save for the future. However, while this may be a good start, many people are only contributing the minimum amount. While your workplace pension can be a valuable source of income when you retire, if you want to ensure you have enough for a comfortable lifestyle in retirement, it may not be enough. Read on to find out why.
Auto-enrolment encourages workers to think about their financial future
In 2012, the government implemented auto-enrolment for workplace pensions to tackle the issue of many people not saving enough for retirement. This was an attempt to encourage people to start building up funds for their financial future, so that they don’t just rely on the State Pension. While that pension is useful, it is unlikely to provide enough for a person to retire comfortably. The government set up the auto-enrolment scheme so that workers can save without having to go through the hassle of setting up a pension themselves. Instead, their employer automatically deducts a portion of their wages and invests it into a pension fund, adding in some themselves too. If you’re aged 22, earn at least £10,000 a year, work in the UK and aren’t already in a suitable workplace pension, you’ll be automatically enrolled into your workplace scheme. The minimum contribution to your workplace pension is 8%, of which your company must provide at least 3%. This means that if they only provide the minimum, then you would need to provide an additional 5%. For example, using the Money Helper workplace pension calculator, if you had a salary of £24,000 a year, your qualifying earnings for your pension would be £17,760. This is your salary before tax (up to a limit of £50,000) and minus the lower earnings limit, which is £6,240. Each month, you would pay 5% of this amount into your workplace pension. This would be £888 a year, or £74 a month and includes basic-rate tax relief of £14.80 per month. Your company would then top up these contributions with an additional 3%, which would be £44.40 a month, or £532.80 a year. This would bring your total minimum pension contribution up to £1,420.80 each year. Note that some employers may make pension contributions based on your full salary. Check with your employer to see if they do this.
The minimum workplace contribution is unlikely to be able to support a comfortable lifestyle
If you regularly pay into your workplace pension, this is a good start when saving for your financial future. However, you should be wary of only paying the minimum amount as this may not give you enough for a comfortable retirement. According to research by Which?, the average comfortably retired household typically spends around £26,000 each year. The amount that you need to contribute towards your pension is heavily dependent on your goals and the desired lifestyle that you want in retirement. Obviously, if you want to take long foreign holidays, you’ll need more income than if you would prefer a more relaxed retirement spent with your loved ones. One strategy that you might opt for is to save a flat 12% of your salary into your pension pot. According to Hargreaves Lansdown, over a 50-year working life, from age 18 to 68, paying in around 12% of your salary should be enough for a modest retirement income for a single person. However, if you want to save more, then another strategy to consider is to increase your pension contributions each year. One popular method is to divide your age by two and use this number as the percentage of your salary that you put aside for retirement. For example, if you start saving at 26 then you would save 13% of your salary. By the time you’re 30, you should be saving 15%, and so on. Of course, the amount that you need to save is different for everyone. That’s why, if you’re not sure how much of your salary to contribute to your pension, you may benefit from seeking professional financial advice.
Increasing your contributions can be a good way to boost your retirement savings
According to research by the International Longevity Centre, published in This is Money, more than a quarter of Brits will have to rely on the State Pension to support them in retirement. While the pension can be the bedrock of your finances, it may not be able to give you enough to enjoy your retirement to the fullest. If you want to save more so that you have enough for a comfortable retirement, there are a few things that you can do:
1. Increase your pension contributions
For younger people, saving for your pension can seem like an unnecessary expense. This can be particularly true when costs of living, such as rent or mortgage payments, are high. However, paying into your workplace pension pot can be a valuable long-term investment for you. When you consider the benefits of tax relief and compound interest, it can look especially attractive. If you want to boost your pension pot, you may want to increase your contributions. You may not notice the loss of one or two percent of your salary from your paycheck, but these can make a considerable difference to your pension over the long term. An added bonus of doing so is that some employers offer to increase their own contributions to match yours when you do, up to a point, meaning you can effectively double the benefits. However, not every employer offers this, so you may want to check with your boss first.
2. Look for alternative ways to fund your retirement
While pensions can be a great way to save for your retirement, they don’t have to be your sole source of income when the time comes. You could also supplement your retirement fund with savings or investments if you want to ensure you have enough. For example, if you’re aged between 18 and 39, one potential option is to open a Lifetime ISA. This can be a tax-efficient way to save for retirement and provides a 25% bonus on top of your contributions. However, you may have to pay a charge if you make withdrawals before the age of 60.
3. Speak to a financial adviser
If you want to be able to retire with the confidence that you’ll have enough wealth to support your desired lifestyle, you may benefit from speaking to a financial adviser. One of the main benefits of doing so is that they can help you to manage your money more effectively, enabling you to build up the pension pot you need. Furthermore, working with an adviser can give you more confidence in your financial future, enabling you to enjoy the retirement you want.
Get in touch
If you want to know more about how seeking professional advice can help you to retire comfortably, get in touch. Email us at office@verve-financial.com or call 0330 320 5048.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. Workplace pensions are regulated by The Pension Regulator. The Financial Conduct Authority do not regulate auto enrolment.
