April’s pay packets will be looking a bit lighter for some, as new rules come into force which mean more cash is being funnelled into workplace pensions.
Since April 6, minimum contribution rates into workplace pensions have been increased – meaning those who only pay in the minimum amounts will see this stepped up. The changes are happening under automatic enrolment – the pensions revolution introduced in 2012 to encourage a greater retirement savings culture in the UK.
Previously, the minimum rate of contributions from staff, their employers and the taxman (through tax relief) was a combined 2 per cent. Now it’s gone up to 5 per cent, and in April 2019 the rate steps up again to 8 per cent.
While everyone’s circumstances and ideas about retirement are different, if you’re just saving the absolute minimum, even with the increase this is unlikely to offer a very comfortable level of retirement income.
Alistair McQueen, head of savings and retirement at Aviva, says that, while the minimum is a “solid foundation”, a 22-year-old saving the minimum throughout their working life could end up with the equivalent of less than half their salary to live on in retirement.
As a very general rule of thumb, someone aiming for a retirement which doesn’t mean a drop in living standards may want to aim for the equivalent of around two-thirds of their salary in retirement, he suggests.
To do this a 22-year-old at the start of their working life may want to consider putting 12 per cent of their salary into their workplace pension. “That can be a scary number,” says McQueen, “but that 12 per cent includes your money, money from the employer and tax relief.”
Another simple way to think about it could be to put £5 away per day, based on a 22-year-old on an average salary, he suggests.
For those who are older who have not saved into a pension previously, saving a salary percentage which equates to around half their age could help them towards a more comfortable retirement, says McQueen. For example, a 40-year-old may want to save 20 per cent and a 50-year-old 25 per cent – although again, this includes money from the employer and tax relief as well as the employee. Workers may also want to try to make sure they have at least 10 times their salary in their pension pot for a comfortable retirement – so someone on £25,000 may want to make sure they have built up £250,000 for example.
McQueen warns strongly against employees opting out of the workplace pension, describing it as “turning their back on free money”.
To find out more about your pension, a good starting point is to take some time to go through your annual pension statement,says McQueen. Many pension companies also have online tools and apps nowadays which can help. You can also speak to your pension company for further guidance. Some people may also want to pay for advice about their finances from a regulated financial adviser.
If you are dissatisfied with the level of advice offered by your employer, the Money Advice Service offers free and impartial guidance and the Pensions Advisory Service also provides free, impartial information about pensions. For those aged over 50, the Pension Wise service may be able to help make the options available clearer.