Pension auto-enrolment means that if you’re employed you’ve likely been automatically enrolled into a pension and contributions are deducted from your pay. However, the minimum contributions may not be enough to secure the retirement you want, and the sooner you identify a gap, the more options you have.
The current minimum contribution is 8% of your pensionable earnings, with 5% deducted from your salary and your employer adding the remaining 3%.
In many cases, the minimum contribution levels will not accumulate enough pension wealth to secure the lifestyle you want. It’s important to understand what income you want in retirement and the steps you can take to achieve this.
Just 27% saving for a “moderate” retirement lifestyle think they’re saving enough
The Pension and Lifetime Savings Association (PLSA) asked pension savers whether they think they’re saving enough for retirement.
Around three-quarters said they were, however, this fell significantly when they were asked about the retirement lifestyle they want to achieve.
41% of people said they wanted a “moderate” lifestyle, described as covering their basic needs and allowing them to do some of the things they would like in retirement. Just 27% believe they’re saving enough to reach this goal.
In addition, 33% said they were saving for a “comfortable” retirement that would allow them to do most of the things they would like. Only 14% of people with this goal feel they’re taking the right financial steps now.
Nigel Peaple, director of policy and advocacy at the PLSA, said: “We have long argued that current contribution levels are not likely to give people the level of income they expect or need.”
The organisation is calling on the government to gradually increase minimum contribution levels for both employers and employees.
Increasing your pension contributions now could afford you a more comfortable retirement and mean you’re financially secure in your later years. If you’re not sure how your pension contributions will add up over your working life and the lifestyle it will afford you, we can help you create an effective retirement plan that will give you confidence.
3 more reasons to increase your pension contribution
1. You’ll receive more tax relief
When you contribute to your pension, you receive tax relief. This means that some of the money you would have paid in tax is added to your retirement savings. Essentially, it gives your savings a boost and the more you contribute, the more you benefit.
Remember, if you’re a higher- or additional-rate taxpayer, you will need to complete a self-assessment tax form to claim the full tax relief you’re entitled to.
There is a limit on how much you can add to your pension while still benefiting from tax relief known as the “Annual Allowance”. For most people, this is £40,000 or 100% of their annual income, whichever is lower. If you’re a higher earner or have already taken an income from your pension, your allowance may be lower. Please contact us if you’re not sure how much your Annual Allowance is.
2. The money is usually invested
Usually, the money held in your pension is invested.
As you’ll typically be saving over decades, this provides you with an opportunity for your contributions, along with employer contributions and tax relief, to grow over the long term. It means your pension savings could grow at a faster pace and create a more comfortable retirement.
If you want to invest for the long term, doing so through a pension can be tax-efficient.
Keep in mind that your pension usually won’t be accessible until the age of 55, rising to 57 in 2028, and that investment returns cannot be guaranteed.