Warnings that millions of people are heading for a retirement crisis due to a shortfall in pension savings are nothing new, but a new government review aims to tackle the issue to prevent a “tsunami of pensioner poverty”.
It’s estimated that a single person will need more than £14,000 for every year of retirement, while a couple will need £22,000 to maintain a minimum level of lifestyle.
It sounds a lot, but it is achievable without the need to immediately start stuffing thousands of pounds a month into an account.
But how do you get there if you haven’t already started saving?
Check employer contributions
If you’re already in work, the first thing you should do is check if your employer pays the minimum three per cent of your salary or higher – some may well offer to match your own contributions, but this might only happen if you opt to pay more.
For example, if you’re paying in five per cent, your employer could raise their contributions by an additional two per cent, and it won’t cost you anything extra or remove anything from your pay packet.
Do remember to ask if it means you change pension plan, provider or anything else though, to make sure it suits your needs.
Focus on building an emergency savings buffer
Next, it’s time to get that money in place so you don’t need to worry about unexpected bills or costs.
Experts say you should ideally have between three and six months’ worth of expenses in an easy-access account paying a good level of interest, to cope with things such as the loss of a job, higher-than-expected living expenses or a major outlay for repairs or purchases.
Again, if you’re just starting out, it’s important to forget the eventual size of the pension pot and focus on the first steps.
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If you are starting with nothing, open a new savings account and start to pay money in weekly or monthly, whichever helps you stay on track best. The consistency of seeing it grow will help you get used to building a savings buffer, and it doesn’t matter if that begins with £5, £20 or whatever else you can initially afford.
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Cut expenses if you need to; one pint of beer fewer a week is about £6-8 (depending where you live), which could add to your savings, and one unused subscription cancelled is a monthly boost of even more than that.
Regularity and time will see you hit your goals.
And, if you are really in need of a quick boost to your savings, you can consider changing banks. Several will offer over £150 in cash or bring other perks to your account if you switch your current account. Check here for details, and always ensure you choose a bank or building society right for your needs, not just which offers the most immediate funds.
Pensions contributions are no different
The same process can see you boost your pension pot once you’ve got a chunk of savings you’re happy with – plus, if you’re putting money into a personal pension, you’ll get tax relief too.
For example, if you’re a basic rate taxpayer and you put £80 into a pension pot, the government will add £20. Again, it seems small, but do that monthly over a 40-year work career and it’s an extra £9,600 being put to work for your future.
“Putting your money away in a pension is a good place to start, rather than a standard savings or investing account. You get the perk of government tax relief on the money and this will significantly boost your pot over time, particularly as you benefit from investment returns on your own money,” said Laura Suter, director of personal finance at AJ Bell.
“The money will be locked up until your pension age, which is currently 57. It means that you can’t dip into the cash if you needed it in the short term, so you need to bear that in mind, but it also means that you can’t be tempted to dip into it before retirement. Even small contributions each month can add up. Putting away £100 a month, which then gets topped up to £125 a month after tax relief, would be worth almost £52,000 after 20 years, assuming 5 per cent investment growth a year after charges.”
What if you earn more but have no pension?
Pension concerns are far from limited to those with low earnings.
There are plenty of reports, for example, of NHS staff – who would typically get a large employer contribution – opting out of that pension plan to receive a larger immediate salary because the cost of living is so high.
If so, trying to take advantage before any possible rule changes might be wise. If you’re a higher- or additional-rate taxpayer – with income over £50,270 this tax year – then making use of the extra tax relief can provide a huge boost to your retirement pot. There, instead of the aforementioned 20 per cent relief, you can get 40 or 45 per cent (whichever tax band you are in).
The government will contribute at the basic tax rate, as your pension provider will claim it for you, and then you are able to claim the additional amounts by noting your pension contribution when you complete a self-assessment form for the tax year.
It has been suggested that such relief may change in future, which makes it important to utilise existing allowances, says Reme Holland, a financial planning partner at accountancy firm Albert Goodman.
“My top advice would be to act now while we know the available allowances and reliefs,” he said.
“For an additional rate taxpayer, you can receive 45 per cent tax relief on your pension contributions, there is the ability to use the last three years of unused allowances via a mechanism known as carry forward. If a flat rate of tax relief is introduced, that could make it far more expensive to fund pension contributions in the future.”
