Why your auto-enrolment pension might not be enough in retirement


After eight years, and with more than 10 million scheme members, auto-enrolment has changed the face of workplace pensions. With more of us saving into a pension and minimum contributions increasing, it might be easy to think about your pension as ‘job done.’ But is this the case?

While an 8% contribution into a workplace pension is a great start, even combined with a full State Pension, it might not be enough to allow you to retire comfortably at the age you want, or with the lifestyle you desire.

Keep reading to find out why your auto-enrolment workplace pension might not be enough, and how to increase your pension pot to make sure you have the retirement you dream of.

What is auto-enrolment?

Introduced in 2012, auto-enrolment was the then-government’s answer to the question of low pension savings activity. By automatically enrolling workers into a workplace scheme – unless they actively chose to ‘opt-out’ – the scheme was designed to make pension saving affordable for employers and attractive for employees.

Figures released last year by The Pensions Regulator suggest that the scheme has been a massive success. Between 2012 and April 2018, the proportion of eligible staff saving into a workplace pension rose ‘from 55% to 87%.’

The minimum contribution amount has risen too, helping you to save more. For the 2020/21 tax year, the minimum contribution is 8%, of which your employer contributes a minimum of 3%, leaving you to pay 5%.

You receive an additional sum from the government too, in the form of tax relief based on the rate of Income Tax you pay.

If you’re a basic rate taxpayer, you’ll receive an additional £20 for every £100 you contribute. Higher or additional rate taxpayers still receive basic rate relief but can claim back additional relief through their annual tax return.

Why this might not be enough?

According to the Aviva retirement calculator, if you are a 30-year-old male earning £30,000 and starting in an 8%, auto-enrolment scheme today, by the age of 68 you could expect a retirement income of £5,500 to £6,000 per year.

With a full contribution history and based on a full State Pension for the 2020/21 tax year, the State Pension could increase your annual pension income to around £15,000.

And yet a recent Which? survey that asked current pensioners how much they spent in retirement concluded that a comfortably retired single person spent around £19,000 a year. This figure rose to £30,000 for a retired single person enjoying a luxurious retirement that included long-haul holidays and a new car.

The figure for a comfortably retired household was an average of £25,000, rising to £40,000 for a retired couple living a luxurious retirement.

Relying solely on your auto-enrolment pension will leave you short, even adding in the State Pension. If you aspire to a more comfortable retirement, you’ll need to find additional retirement income.

Increasing your income in retirement

There are several ways to increase the level of your income in retirement.

  1. Top-up your pension

If you can afford to, the simplest way to increase the size of your pension pot, and therefore your income in retirement, is to top-up your pension and increase the size of your contributions.

If you’re approaching retirement, making the most of tax-efficient pension savings in the last few years before retirement can make a big difference.

For the 2020/21 tax year, the Annual Allowance – the amount you can contribute to your pension and still benefit from tax relief – is £40,000. This is across all schemes you hold and you can normally carry over any unused allowance from the last three years too.

If you have an unused allowance be sure to use it but check that the standard Annual Allowance applies to you.

Accessing benefits flexibly can trigger the Money Purchase Annual Allowance (MPAA), lowering your allowance to £4,000. High earners could also be subject to the Tapered Annual Allowance.

Speak to us if you’re unsure which allowance applies to you and we can ensure you maximise your pension savings without falling foul of additional tax charges.

  1. Make the most of other investments

Pensions aren’t the only tax-efficient way to fund retirement.

Interest from Cash ISAs is tax-free and any gains you make on investments in a Stocks and Shares ISA are free of Income Tax and Capital Gains Tax (CGT). The current ISA allowance is £20,000 so be sure to make full use of the ISA allowance if you can afford to.

Other investment options you might consider are fixed-term bonds, timed to pay out at retirement. A Unit Trust or an Open-ended Investment Company (OEIC) might also be a way to see your wealth grow, topping up any shortfall left by your auto-enrolment pension.

  1. Speak to us

Speaking to an adviser to help you plan your retirement is the best way to ensure you get the retirement you want.

We can get to know you, understand your current financial position, and your aspirations for the future, and put a plan in place that helps you achieve your goals.

By checking in on your pension and investments regularly, we can make sure you’re on track, whatever life throws at you.

Get in touch

If you’d like to discuss any aspect of your current provision, including a possible shortfall in your workplace pension, get in touch. Please email info@investmentsense.co.uk or call 0115 933 8433.

Please note

A pension is a long-term investment not normally accessible until 55. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation which are subject to change in the future. Workplace Pensions are regulated by The Pensions Regulator.