Pension saving reaches record high
More people than ever before are contributing to a pension, now that employees are automatically enrolled into company schemes. We explain why it’s vital to plan for retirement.
What you’ll learn:Click to toggle accordion What you’ll learn:
How auto-enrollment works.
Why you should consider making more than the minimum employee contributions.
Where to save for retirement if you don’t have access to a company pension.
More people in the UK are saving towards retirement than ever before, according to data from the Office for National Statistics (ONS), with numbers boosted thanks to the government’s auto-enrolment scheme.
Under auto-enrolment, employees are automatically signed up to a workplace pension into which both they and their employers must contribute. Workers can opt out of the scheme if they want to, but the hope is that valuable employer contributions encourage people to stay. The scheme was introduced in October 2012 to boost the numbers of people planning for retirement and began with the largest employers first, followed by medium-sized then small employers.
Nearly three-quarters (73%) of employees were contributing to a company pension scheme in 2017, latest ONS figures show,1 up from 67% in 2016. Those aged between 22 and 29 had the biggest growth in pension membership, with 73% in this age group belonging to a pension in 2017, compared to 65% the previous year.
Increasing contribution levels
Prior to April 6, 2018, employees only had to contribute 0.8% of their qualifying earnings into a workplace pension, topped up by 0.2% tax relief, whilst employers paid in 1%.
Minimum contributions for auto-enrolment increased on April 6, 2018, so workers must now pay 3% of their qualifying earnings into a pension, including 0.6% of tax relief, whilst employers must make contributions of 2%.2 Your qualifying earning are your earnings from employment, before income tax and National Insurance contributions are deducted, that fall between a lower and upper earnings limit set by the Government. These limits are £6,032 and £46,350 for the current 2018/19 tax year.
Next year, contribution limits will increase again, so that from April 2019, employees must pay in 5% of qualifying earnings, including 1% of tax relief, and employers must pay in 3%.3
It’s important to remember that these are only minimums, so you or your employer can choose to pay more into your pension if you or they want to.
Why it’s so important to save for retirement
Saving for the future is vital if you want to enjoy a comfortable retirement. Relying on the state alone to support you could prove a costly mistake, particularly as the age at which you can claim the state pension is being pushed further and further back.
Last summer the Department for Work & Pensions decided that rising life expectancy meant that the increase in the state pension age should be brought forward to 68 between 2037 and 2039, seven years earlier than planned.4 The age at which you can make withdrawals from a workplace or private pension is is set to rise from 55, to 57 by 2028 and then on to 58, it is still well before you can receive your state pension. Bear in mind that if you belong to a workplace scheme, you may need the consent of your employer or former employer if you want to access your pension benefits before the scheme’s normal retirement age.
According to research by consumer association Which? retired couples last year spent on average £2,200 a month, or around £26,000 a year, on basic expenses such as food and living costs and some luxuries such as European breaks and eating out. If you reach state pension age after April 6, 2016, the full level of the new state pension is £164.35 a week, although the actual amount you’ll get will depend on your National Insurance record.5
Which? claims that to achieve an annual income of £26,000 a couple would need a defined contribution pot of £210,000 in today’s money which then goes into income drawdown at retirement, alongside their current state pension entitlement. The majority of company pension schemes are defined contribution schemes, where the amount you’ll receive at retirement depends on how much you’ve contributed, investment returns and tax relief. Income drawdown allows you to take an income from your pension, while keeping it invested.
To save £210,000, Which? says you’d need to put away £131 a month from the age of 20, rising as much as £633 per month if you leave your retirement saving until you reach the age of 50. This example assumes investment growth of 3% and that the sums saved have receive basic rate tax relief at 20%.6
Options for the self-employed
Whilst employees are automatically enrolled into workplace pensions, the self-employed won’t have access to this type of pension and won’t benefit from employer contributions.
However, there are plenty of pension options for them to choose from.
A personal pension, for example, like most workplace pensions, is a type of money purchase or defined contribution pension scheme. You make contributions into the scheme, which will then usually be invested on your behalf by the plan provider.
There are also stakeholder pensions, which tend to be cheaper than other schemes, but often provide a narrower range of investment options.
Another option is a Self-Invested Personal Pension or SIPP, which is also a type of defined contribution pension, but you won’t be restricted to investments offered by any single pension provider. SIPPs may appeal more to experienced investors who are happy to monitor and manage their pension themselves. However, you need to be sure that you have the necessary investment skills to do this or seek advice. Bear in mind that the investments that you hold in a pension scheme can fall in value as well as rise. Also, remember that pension and investment tax rules can change in future and their effects on you will depend on your individual circumstances.
The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.
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