Workplace Pensions are a form of Defined Contribution scheme. This means that the percentage of your earnings that both you and your employer add to your pension fund is unlikely to fluctuate from month to month.
Until April, the minimum contributions for both you and your employer were 1% of your qualifying earnings. This has now increased to 2% for employers and 3% for you. A further rise is due in April 2019 which will see employers contribute 3% and your share will hit 5%.
Who is affected?
Automatic enrolment has seen an additional nine million people join those who were already part of a Workplace Pension, but it does not include all working adults. Instead, auto enrolment has introduced pensions for those who are:
- Aged between 22 and State Pension Age
- Employees in the UK
- Earning more than £10,000 per year
- Who were not already in a Workplace Pension
This means that the self-employed, those under 22 and anybody earning less than £10,000 are not automatically covered and could still be without a Workplace Pension.
How are contributions calculated?
Contributions are calculated using your ‘qualifying earnings’; the amount you earn which is between the minimum threshold of £5,876 and an upper limit of £45,000. Therefore, some people may be in danger of lulling themselves into a false sense of security, thinking they have enough money to retire on, when they don’t.
How will my pension be affected?
For someone on an average full time salary of £28,600 (Source: Office for National Statistics (ONS)), the 2018 increases could add more than £45,000 to their eventual retirement fund over 40 years. If minimum contributions were to remain at 1% for both employers and employees, the same person will have saved £52,600 (calculated using the Aviva Retirement Planner, assuming an average annual rate of return of 2.4%.)
When will I be able to access my pension?
You can access the capital in your workplace pension from 10 years prior to your State Pension Age. Currently, this is 55, however due to the increasing Pension Age, you may have to wait until you are 58.
Pension Freedoms has ensured that the options facing you when you can access your retirement put you in control of your finances. Though this does carry some risks including the potential to spend too much, too soon and leave yourself with limited means in later life.
What happens if I opt out?
You have the right to opt out of your workplace pension, although it’s almost never the right thing to do.
According to research from Aviva, 4% of people intended to opt out of their Workplace Pension when minimum contribution levels increased this year. However, a report from AJ Bell shows that the increase in pension contributions is unlikely to have a major effect on the day-to-day budgeting of average earners.
For someone on an average salary, the increase will mean that they are only putting an additional £30 into their retirement fund each month; which is less than £1 per day.
However, by opting out of your workplace pension, you lose much more than that. After factoring in your employer’s contributions and tax relief (which is effectively free money), the average earner could be passing up a substantial boost to their retirement income.
Can I pay more into my Workplace Pension?
Yes. There are two ways to do so:
Lump sum contributions: You can make additional contributions to your pension fund by contacting your scheme provider or company HR department. This is useful if you find yourself with spare cash to contribute.
Increasing your monthly contribution: If you can afford to pay a larger portion of your income, you may choose to voluntarily increase your monthly contributions.
How can I make the most of my Workplace Pension?
Making the most of your Workplace Pension now, will put you in a more financially stable position in later life when you stop working and begin to enjoy your retirement. One of the easiest ways to make sure that your finances are on track to meet your retirement goals is to talk to a financial planner.
A professional will be able to help you to identify your goals and find strategies to help you work toward them and secure your ideal retirement lifestyle.
For more information, get in touch with Bev or Sarah on 0115 9338433.