Don't waste time, sort out your pension

Millions of people who have been automatically enrolled into their workplace pension will soon have to pay more of their salary into the schemes.

But while the increase is considered necessary for long-term savings, many employees in Scotland are unaware of the impending rise and it’s feared that some will simply opt out instead.

Just 10 per cent of enrolled workers have so far exercised their right to opt out of their scheme, but their resolve may be tested when contribution levels increase over the coming years.

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Employees currently have to pay in a minimum of 0.8 per cent of qualifying earnings, with the employer contribution (1 per cent) and tax relief (0.2 per cent) taking the total to 2 per cent. The total will increase from April 2018 to 5 per cent, with the employee contribution from salary jumping to 2.4 per cent.

The minimum contribution will rise again in April 2019 to a total of 8 per cent, including 4 per cent of the employee’s salary.

The increases will for many people feel burdensome, 
making a noticeable dent in take-home pay.

“Perhaps someone could cope with £10 per month but by 2019 this will be £50, no longer small change to a family on a budget,” said Sarah Tory, financial adviser at Shepherd & Wedderburn Financial in Edinburgh.

“Will people accept it and see it as a positive that more is going to their future or will that lower-than-expected opt-out rate increase?”

Almost seven in 10 workers in Scotland are unaware that higher contributions are on the way, according to new research by Scottish Widows. It also found that 23 per cent believe financial pressures will prevent them from saving any more money into their workplace pension.

But many people may not realise how much they need to contribute to provide a decent retirement fund, according to Tory.

“The fear of having no pension provision is now being replaced by the comfort that it is all being taken care of, but the reality is that even 8 per cent a year is unlikely to produce a satisfactory retirement pot for most.”

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The rule of thumb typically used by advisers is that for a decent pension pot, savers should set aside half their age as a percentage of earnings.

“Therefore someone starting pension planning at age 20 needs to have contributions of 10 per cent, so if their employer is making 3 per cent, they will need to fund the other 7 per cent,” Tory explained.

“Push that forward to someone just starting to make pension provision at 40 and that figure jumps to 20 per cent.”

The most effective approach is to start as early as possible with as much as you can afford to save, she said.

“Auto-enrolment is a good platform to start pension planning from but it is not the answer if relied upon solely,” according to Tory.

“Savers don’t have to put all their eggs in one basket; they can take out new pensions elsewhere or even consider alternative investments to run alongside, such as the lifetime Isa being introduced in April.”

The alternative to working out how much you should save is to think about how much you might need later in life.

“As a guide, a meaningful target would be to aim for half your income at around age 40,” said Tory. “At this age your mortgage costs, childcare/school fees and commuting are likely to be at their highest. With the assumption that these will be removed at retirement, half of your income then should be a good goal.”