19th April 2018
You probably know that the minimum pension contributions have increased for those who have been auto-enrolled.
Previously, the contributions for both you and your employer were 1%, but since the 6th April, this has increased to 3% for you and 2% for your employer. These are minimum amounts only, and either party can choose to contribute a bigger percentage each month.
The required amount contributed by you and your employer will be calculated based on your qualifying earnings, for 2018 this is your annual income between £5,876 and £45,000.
For the average full-time salary of £28,600 (Source: Office for National Statistics), the qualifying earnings will be £22,724.
What does it mean for you?
There are two main things you need to think about in relation to the increase:
1. Less money on pay day
It might feel like a sacrifice to give up a larger percentage of your income each month. However, that money is not lost forever, it has simply been put away for later. Furthermore, while ever you are meeting the minimum contributions, your employer is obligated to meet theirs, effectively giving you free money to live on in retirement.
The increase from 1% to 3% will cost the average earner, roughly £30 per month; less than £1 a day. Therefore, most people should be able to amend their personal finance to cope with this change.
2. A retirement fund increase of £46,000
Without an increase in minimum contributions, the average earner would retire after 40 years of work with around £52,600 in retirement capital. The rise in minimum contributions could boost this to £98,300. (Retirement fund totals calculated using the Aviva Retirement Planner, assuming an average annual rate of return of 2.4%)
By almost doubling the capital available when you retire, you could buy a guaranteed income of £6,240 per year, rather than £3,415. (Annuities calculated using Aviva’s Pension Annuity Calculator)
Is it enough?
If you qualify for it, your Full State Pension will currently add £8,296 to the £6,240 guaranteed income you could purchase with your pension fund.
That’s an annual pre-tax income of £14,536, or £1,211.33 per month.
That sounds liveable, especially if your partner will have a similar income. However, research from Aegon says that, in order to maintain your current lifestyle when you stop working, you should be aiming for an income which is at least two thirds of your working income. For a salary of £28,600, the average annual salary, that’s £19,000.
That leaves you £4,500 short.
What are your options?
To meet the £19,000 target, you will need to provide an annual income of £11,000 to be added to your State Pension. That means that you will need to have saved around £200,000 by the time you stop working. Of course, if you want a higher retirement income, you will need a larger pot.
To enjoy a financially secure retirement, you can:
Contribute more to your pension: Either by increasing your monthly contributions or making ad-hoc lump sum deposits when you can.
Delay retirement: If you choose to work past State Retirement Age, you can opt to delay receiving your pension. For every year that you put off receiving your pension, your eventual income will increase. In addition, if you continue to earn an income, your Workplace Pension will continue to grow.
Accept the shortfall: If you do not want to save more, or work for longer, you may have to work with the resources you have and simply live less extravagantly in retirement.
Seeking financial advice
Research from Unbiased has shown that, those who seek financial advice could save an extra £98 per month toward retirement, resulting in an annual income increase of £3,654 (which almost bridges the income gap for you).
For more information, and to talk to a financial adviser about retirement planning, get in touch with Ben on 0113 262 1242.