Paying as much as possible into a pension can help you enjoy the retirement you’ve always wanted
Millions of employees have joined workplace pension schemes as a result of the government’s auto-enrolment programme. This marks a dramatic rise in the number of people saving through company pensions. According to government estimates, the programme will add an extra £17 billion a year of retirement savings by March 2020.
Rises in life expectancy, combined with squeezed government finances, means we will all need to provide more for our own old age, and auto-enrolment can be a good place to start. By 2019, employers will have to pay 3% of salaries into such schemes, on top of a 5% contribution from employees themselves. But it should be seen as only the start: simply setting aside these minimum contributions is unlikely to add up to enough to finance a comfortable old age, even if you join a scheme as soon as you start work.
Consider these sobering statistics from Royal London’s policy paper The Death of Retirement. To achieve the gold standard pension provision of two-thirds salary, rising in line with inflation and providing for a spouse after death, a person on average earnings making just this minimum contribution would have to work until the age of 77, assuming they started saving at age 22. Put off saving until the age of 35, however, and the retirement age extends out to 79; defer another 10 years and you would need to work until the age of 81.
Of course, not everyone will need that kind of gold-plated income in retirement; settling for a bit less or opting out of inflation-protection of a pension for the surviving spouse will mean you can reach the target more quickly. But the underlying point is clear. If you want a decent retirement income while you are still young enough to enjoy it, you need to start saving early and to save as much as you can afford.
There are a variety of ways you can do this. The most important one is to ensure that you do actually join any scheme which is available: while you can choose to opt out of auto-enrolment, if you do not have any other pension arrangements, you will be missing out on the employer’s contribution, government tax relief and your own savings. Many auto-enrolment schemes allow you to make additional contributions: check with your employer or the organisation that runs the company’s scheme.
Some companies offer company pension schemes outside the auto-enrolment system and these can have higher contribution levels, from both employers and employees. You can also save into a private, or personal, pension at the same time as you are contributing to a workplace scheme – although you should make sure that you do not breach the government limits of £40,000 a year in contributions, or the lifetime allowance of £1 million, which is the maximum you can have in a pension pot without tax penalties.
The introduction of these restrictions on the amount that can be saved into a pension, combined with the rise in the amount which can be saved into both conventional ISAs and new schemes like LISA, the Lifetime ISA, means that some people are now choosing to use a mixture of savings vehicles to build up a pot for retirement. The best arrangements will depend on your personal circumstances. What is important, however, is that you review your arrangements regularly and check that your savings are on track.
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