Pensions are back in the spotlight after the government announced new measures to tackle the growing issue of people failing to have enough money when they retire.
Liz Kendall, the work and pensions secretary, said on Monday that almost half of the working age population “isn’t saving anything for their retirement at all”. She has revived the pensions commission, which last met in 2006, in a bid to determine how best to help workers after experts warned that people looking to retire in 2050 are on course to receive £800 per year less than current pensioners.
The scale of the issue cannot be underestimated.
Rachel Vahey, head of public policy at AJ Bell, said the government’s own analysis pointed to a “dire need for intervention”.
“Retirees in 2050 are on course for 8 per cent less private pension income than those retiring today. While automatic enrolment has created 11 million new pension savers, many are saving the bare minimum,” she said.
“The demise of private sector defined benefit pensions and a levelling down of contribution rates by some private pension schemes have meant that, although there are more pension savers in the UK, they are not all saving enough.”
To put that into perspective, the Retirement Living Standards says you need £14,400 a year for a single person or £22,400 for a couple, just to have a minimum comfort lifestyle. For 20 years of retirement, that’s an outlay of £280,000 at the bare minimum. And, if you’re targeting a comfortable retirement, that can rise to around £44,000 for a single person and £60,000 for a couple.
So what can you do right now to ensure you’re better off when you do retire? The Independent takes a look.
Employer contribution amount
A common complaint with pensions planning is that, with tough living conditions, many need money now – never mind years from now in retirement.
So, as a starting point, check your employer contribution to your pension and what else they have on offer.
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The automatic enrolment scheme requires eight per cent overall to go towards your pension, with employers contributing three per cent at a minimum.
However, many workplaces may offer a higher amount than that to match your own contribution – so they’ll go up to to five per cent if you pay the same amount for example, but only as an opt-in option.
As such, you should absolutely ask your workplace if that’s the case and see what you need to do – this may just be signing a form or clicking a box online. Do check if it means you have a different pension provider, plan or any other changed details to ensure it suits you.
On a £35,000 salary across five years with a firm, that extra two per cent is an additional £3,500 going towards your pension pot – without any change at all to your payslip.
Changing your own contribution
Also linked to the above is a change in your own contribution level.
Yes, upping your pension contribution means less money going into your bank account immediately. But small sums which aren’t so noticeable now might work out in your favour later on.
On a £35,000 salary one per cent is less than £30 per month. Upping your contribution rate from 5 per cent to 6 per cent, for example, will only see you get a small amount less in your pay packet – you’d have National Insurance and tax taken off before it arrives in your bank account – but over a 40-year career, that’s more than £14,000 extra going towards your pension.
The perfect time to do this might be after you secure a new job, promotion or pay rise as you won’t feel any hit from one month to the next.
And, don’t forget, that doesn’t mean your pension total value goes up £14,000 – it means there’s that amount extra going towards the investments which are in your pension fund.
Over the long term, investments tend to outperform cash, so over that four decade period of time, you’d expect it to contribute to grow your total pension fund by more than that value.
As you get older, you may find you have the financial ability to contribute more towards pensions without compromising your living standards; if so, it’s certainly something you should consider, especially if you do not already invest separately.
State pension, SIPPs and the self employed
There’s of course more you can do, depending on your circumstances, to ensure you’re not left struggling when it comes to retirement.
The first thing in the years before you hit state pension age is to check you don’t have any gaps in your record.
You can backpay National Insurance contributions to “buy” those years, but do the sums first (or check with an advisor) to ensure it makes financial sense for you to do so. Typically, you’ll need around three years of pension payments to reclaim that extra initial outlay.
Additionally, you may well have pension plans outside of your workplace one.
If so – such as a self-invested personal plan (SIPP), a Lifetime ISA or a personal pension which is managed for you – you can make contributions to these and receive an additional payment towards it in the form of tax relief at the same rate as you pay tax on your salary.
Ideal times for this might be when you get a raise, earn a larger than usual commission, receive a bonus or sell some personal items.
Last but not least, self-employed people are at extreme risk of a later-life shortfall. It is estimated more than 80 per cent of self-employed people do not save towards a pension at present. If that’s you, this is what you need to know about changing that.
