There’s no doubt that, on the face of it, Automatic Enrolment has been a success, with six million new workers now contributing to a pension and 95% of employers complying with the new rules (Source: BBC, July 2016).
However, scratch below the surface and the picture isn’t quite as rosy.
A number of factors affect the size of your pension pot, and consequently the income it will provide. These include:
- The amount you contribute
- The length of time you pay in for
- The amount taken out in charges and fees
- The rate of growth your pension achieves
It is the amount workers are paying into their pension, after being automatically enrolled, which is causing concern amongst pension experts. Indeed, it has led Steve Webb, the former Pensions Minister, to say that current contribution rates are “woefully inadequate to provide a decent retirement”.
How much are workers contributing?
Until April 2018, the minimum total contribution which must be paid when a worker is automatically enrolled is 2% of their ‘qualifying earnings’, which are defined as your earnings between £5,824 and £43,000 including: salary, commission, bonuses and overtime.
Over time, this will rise to 8%, of which at least 3% must come from the employer.
With the average salary in the UK at £27,600 (Source: ONS 2015) this means the minimum contribution in 2018 (assuming that the average salary doesn’t change) will be £184 per month.
Sounds a lot? Maybe, but it probably won’t replace the pre-retirement salary of £27,600.
In fact, our pension calculator shows that a monthly contribution of £184, achieving a 5% rate of growth (and there is no guarantee that returns will be that high), over a 20-year period, would produce a pension pot of just £81,359.
That £81,359 might have to last you another 20, 25 or even 30 years.
See the problem?
The problem is compounded by the fact that experts are concerned workers will feel that they have ‘ticked the pensions box’ when they are automatically enrolled. When in fact they are not contributing enough to provide a comfortable retirement.
What are your options?
First things first, you need to know the size of your shortfall in retirement.
This is a relatively complex exercise based on a series of assumptions and we would always recommend it is undertaken by an Independent Financial Adviser.
Assuming you have a shortfall (and most of us do!) you need to consider how best to make it up, to ensure you have the retirement you have dreamed of, or at least can afford to pay the bills!
If you have been automatically enrolled into a pension, or indeed have an alternative workplace pension, which isn’t going to give you enough income at retirement, the options you have include:
Paying more into your workplace pension Most schemes allow you to pay more in than the minimum we mentioned earlier. There’s also no harm in asking your employer if they would match your additional contributions; they might say no, then again, they might surprise you
Taking out a separate pension If, for whatever reason, you decide not to pay more into your workplace pension, you could, subject to certain limitations on the maximum you pay in, take out an additional pension. Some people believe that you can’t have more than one pension, you can, whether it’s the right option or not is something you should discuss with your adviser
ISAs You won’t get tax-relief on your ISA contributions in the same way you do if you contribute to a pension. But you won’t pay tax on any money you take out; furthermore, you won’t have to wait until at least 55 to access the money if you need it before you retire
Lifetime ISA If you are under the age of 40 next April, you could take out a Lifetime ISA and get tax-relief, which is not available on ‘traditional’ ISAs. Providing you use the money you’ve built up to help fund your retirement (or buy your first house) then you get to keep the tax-relief which has been added to your contributions
Buy to Let This has been a popular option in the past, however the changes to stamp duty, and the way rental income is taxed, will probably make this a less popular option in years to come
Please remember, the FCA does not rgulate buy to let mortgages.
Maximising your State Pension The State Pension is the foundation of most people’s income in retirement. Big changes have been introduced in recent years and you now need to have paid National Insurance for at least 35 years to get a full State Pension. If you are close to retirement, and haven’t contributed enough National Insurance, you should look at the options you have for topping up your record
Pros and cons
Each of the options we have briefly mentioned above has its own individual pros and cons, too numerous to mention in an article such as this. It’s also important to consider how each one would interact with your existing pensions, savings and investments.
Which is why, we would always recommend you take independent advice before making a choice.
As we said earlier, your adviser will calculate your shortfall and tell you what you need to do to fill the gap; of course, it is always up to you whether or not you take action, but at least you will be able to make an informed decision.
Here to help
Bev and Sarah are both highly experienced financial advisers and are here to help you plan for your retirement.
Call them on 0115 933 8433 or email email@example.com