Take control of your finances - Caroline Murphee

Sadly, for many, the cost-of-living crisis is dominating our day-to-day lives, as household budgets across Scotland are being squeezed. Everyone is feeling the strain: two-fifths (42 per cent) of Scots feel less in control of their finances than ever before, and 62 per cent say the cost-of-living crisis has already had an impact on their short and long-term financial goals. In this moment, it is difficult to look beyond the here and now, but it is arguably even more important to take control of our financial futures, to make the right decisions for both our current and future selves.

Impact of the cost-of-living crisis on retirement planning

At Moneybox, we recently conducted a survey to understand how people are feeling about their finances. While 58 per cent of Scots remain confident that they will achieve their financial goals over time, despite current financial challenges, when it comes to planning for retirement, six in ten do not know how much they need to save for their ideal retirement or how much they have already saved towards it. Perhaps understandably, as a result, more than half (53 per cent) say just thinking about retirement makes them feel anxious, overwhelmed, and even guilty for not having started planning for retirement sooner. Nonetheless, there are simple initial steps - such as figuring out how much you already have saved, or how much your employer is contributing to your pension - that can make saving for retirement seem a little less overwhelming.

The current cost of living crisis is exacerbating people’s concerns, and leading them to rethink their current pension contributions: 35 per cent say rising costs will likely mean they will need to reduce their pension contributions and 1 in 4 say they will need to stop payments altogether, as they prioritise short-term needs.

Caroline Murphree, MD Moneybox Retirement

While this is understandable, given the pressure on people’s wallets, it also has significant long-term implications. Stopping pension contributions means that people may also miss out on tax relief, employer matching, and the long-term benefits of compounding. For example, for a basic rate taxpayer, contributing £100 into a workplace pension could amount to £160 in total saving, due to employer contributions and tax relief; whereas that same £100 in a pay check will be reduced to £80 in their pocket after tax.

The need for stronger engagement with pension savings

In the UK, we were never taught how to effectively plan for retirement, which has contributed to the sense of uncertainty and anxiety that many people feel. When Defined Benefit pension schemes were more common, employers and scheme administrators took on most of the work of managing pension assets, and total contributions were often 20-25 per cent of pensionable salary for a scheme member. With the rise of Defined Contribution schemes, these responsibilities shifted to the individual saver, but without a commensurate increase in support or financial education. TISA estimated that in 2018, the average total contribution to DC schemes was only 5.1 per cent of pensionable salary per scheme member.

In a time of economic uncertainty, engaging with pensions earlier and making the most of the benefits available today is the only way to close the gap and make sure that we are setting ourselves on the right path. The earlier that people start to engage with their pensions, the longer the time frame during which they can take advantage of its benefits or make course corrections to their savings path.

More also needs to be done by employers, government agencies and pension providers, to support and empower people to get to grips with their pensions earlier in life, and to break down the many barriers to pension engagement, including the anxiety and guilt that many people feel.

How we can start to take control of our financial futures

First, track down old workplace pensions. 48 per cent of Scots believe they have lost track of some or all of their old pension pots. You may be able to find “free money” that you have already saved.

Second, focus on what you can control in the present. Only 38 per cent of Scots feel they know how much they need to save for their ideal retirement. If you don’t, or if you feel a long-term goal is too abstract, think about contributing a percentage of your salary every year (a common rule of thumb is to take the age at which you started saving for retirement, divide by two, and aim to contribute that percentage). If even that is too much right now, smaller contributions can still make a difference, rather than stopping completely.

Third, take advantage of the benefits available. You don’t have to save that percentage of your salary all on your own. Make sure you understand how much your employer will contribute, including whether they will also match contributions that you make.

Finally, explore whether consolidating pensions is the right option for you. Managing multiple pensions can be challenging, particularly if your schemes don't always keep you in the loop about how your pensions are performing (or even how they’re invested). Consolidating all your pots into one personal pension might help you save on fees and make it a more straightforward hassle-free process.

Caroline Murphree, MD Moneybox Retirement