I have a pension so I am fine
The implementation of auto-enrolment means that the vast majority of employees in the UK will be saving for a pension. The policy, enacted in 2012, obliged firms to enter their employees into a workplace pension unless they opted out.
While this development has been seen as universally positive, with government estimates suggesting the total membership of defined contribution schemes rose to 21 million in 2019 from just 2.1 million in 2011, it doesn’t mean everyone is saving enough.
The Pensions Policy Institute estimates that an appropriate pension contribution varies between 14%-27% of total salary, with many people needing to make additional contributions due to starting late or not paying enough. This estimate is well below the 8% minimum contribution rates for auto-enrolment (made up of 5% minimum direct contributions and 3% minimum employer contributions).
While contributions in the 27% region are an outlier, many people can boost their contributions from their current levels. Doing so earlier rather than later is often a positive step, given that the value of contributions made in your 20s will be around four times greater than a decade’s worth of contributions made in your fifties.
Ensuring greater financial stability for yourself is also vital given it’s difficult to know how much the state pension will be when you retire.
What are the benefits of saving for a pension?
Apart from helping you to secure a certain standard of living, the three big financial benefits of saving for a pension are:
- Pension contributions from your employer
- Tax relief from the government
- A long-term investment which compounds over time.
Together, these factors mean that someone saving the minimum 8% under auto-enrolment will build up a significant pension over time – one that is roughly five times bigger than the money they put in themselves. Of course, if you contribute more than the 5% minimum an individual can make, your direct contributions will make up a bigger percentage of your pension in the end.
How much do I need to save for my retirement?
The answer to this question will be as varied as the individuals who ask it, because it depends when you started saving into your pension and what you expect your standard of living to be like in retirement. A rough rule of thumb is to take the age you start saving for a pension, halve it, and take that as the percentage of your pre-tax income that you should be saving.
For instance, if you started saving for a pension at the age of 40, and had a pre-tax salary of £70,000, your pension contributions would be £14,000 a year.
Where should I invest my pension?
This comes down to personal preference again, but pension investments should reflect your age and, therefore, how close to retirement you are. A younger person several decades away from retirement may want to opt for most of their pension in higher growth, higher risk assets, like equities. This is because the long investment time horizon of a younger investor allows for volatility to be smoothed out over time to produce better returns than a low-risk option.
Someone closer to retirement will typically hold more of their pension in lower risk assets, such as fixed income. However, this does not have to be the case, and pension investment strategies can be tailored to the individual’s requirements and circumstances.
Here to help
At Quilter Cheviot, we can help you save for your pension and work with your financial adviser to ensure you are invested sensibly, and that you are on track to meet your retirement goals. Besides guiding investment strategies, we consider your current pension arrangements, future saving plans, and how to manage your pension in retirement.
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