Articles

Should you increase your pension contributions?

7 minutes

The first step to a secure retirement is saving enough money. But how much is ‘enough’? Will recent changes to auto-enrolment help you reach your target? And what happens if you’re outside of an occupational scheme?

  • Do you know how much you need for retirement?
  • Are you on track with your current pension scheme?
  • What are your options for increasing contributions?

Should you increase your pension contributions?

People aren’t saving enough money into their pension pot for a comfortable retirement. That’s according to the results of our State of Retirement report, which found that Brits between 45 and 54 years old currently have an average pension pot worth £71,342.

The annual income figure commonly considered ‘sufficient’ in retirement is between £23,000 and £27,000. Bear in mind that a full new state pension in 2019/20, based on 35 years’ contributions, will be £168.60 a week (£8,767.20 a year), which leaves a shortfall of over £14,000 a year. After just five years, the average pension pot mentioned above would have been used up [1].

If you can increase your pension contributions, doing so, then, seems like a no-brainer. And thankfully, recent and upcoming pension changes will help.

Pension contributions on the rise

Following automatic enrolment, instead of 47% of UK employees being in a company pension scheme, as was the case in 2012, some 73% now automatically save each month [2].

Minimum workplace pension contributions have also increased, and are set to increase again in 2019.

Before April 2018, only 2% of a worker's qualifying earnings went into their pension, including an employer's contribution of at least 1% [3]. In April 2018, this rose to 5%, with at least 2% coming from the employer. The amount rises again, in April 2019, to 8%, with employers paying at least 3% of that minimum total.

To put this into context, if you earn £2,500 gross per month, from April 2019 your employer will put £75 (which is 3% of £2,500) a month into your pension and you’ll be personally contribution £125. In total, £200 a month will be going into your pension fund.

Of course, it depends on your income

So while a monthly pension total contribution equivalent to 8% of your salary might sound a lot, industry experts are actually quoting an ‘adequate’ figure of up to 20%, depending on how investments perform over the next 40 years [4].

What can you do to increase your contributions?


Talk to your employer. Their additional pension contributions are free of National Insurance Contributions (NIC), so they may be persuaded to up their input and then pass on their NIC saving to your pension.

Upping your pension contributions also applies if you are self-employed – but ONS figures show that nearly half of self-employed workers between the ages of 35 and 54 have no pension savings at all, compared to 16% of employed workers in the same age group, while around 30% of self-employed over-55s have no pension savings [5].

The future could, of course, contain some considerable variables. When you retire can have a massive impact on how much you need to save, as can delaying taking a pension beyond the current minimum age of 55.

If you're wondering if you are fully covered you might want to have a pension review. The government website is a handy place to start.

You might also want to make sure that you’re keeping track of all your pension pots if you’ve changed jobs. Read our article on the  for details on who can help and how to start.

Armed with the relevant information on how much you’re likely to amass, you could then check whether this will be sufficient to secure the annual income in retirement you’re hoping for with an online planner such as the LV= pension calculator. From there, you can also calculate how much more you might need to squirrel away, and/or when you can afford to give up full or part-time work.

What if you need to save more?


Then it could well be time to take professional advice from someone who can assess your means, aspirations and attitude to risk, and compile an investment plan to get you to your destination.

For instance, you could increase the amount you’re currently putting into your occupational pension scheme. The 8% workplace pension contribution, starting in April 2019, is a minimum: you or your employer can contribute up to £40,000 a year between you – just make sure you don’t exceed the tax-free lifetime allowance of just over £1 million.

On the flip side, make sure you only commit to saving what you can realistically afford. It’s sensible to start modestly, then top up. If you’re in a company pension, consult with your HR department and potentially ask if they’re willing to match any increase in your contributions – they can only say ‘no’.

You also have the option of putting any additional money available into an ISA or other savings product. Equally, you are entitled to transfer to what you might regard as a better pension scheme or consolidate a number of different pots into one.

As with all these matters, seeking out expert independent advice is paramount before taking a major step.

Sources

[1] Department for Work and Pensions, 2017. Benefit and pension rates 2018 to 2019, GOV.UK. https://www.gov.uk/government/publications/proposed-benefit-and-pension-rates-2018-to-2019 

[2] Office for National Statistics, 2018. Pension participation at record high but contributions cluster at minimum levels, https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/workplacepensions/articles/pensionparticipationatrecordhighbutcontributionsclusteratminimumlevels/2018-05-04

[3] The Pensions Regulator, 2017. Knowing your client's ongoing duties, https://www.thepensionsregulator.gov.uk/en/business-advisers/automatic-enrolment-guide-for-business-advisers/9-knowing-your-clients-ongoing-duties/automatic-enrolment-earnings-threshold

[4] Daniel Redwood, Leandro N. Carrera, John Armstrong and Teemu Pennanen, 2013. What level of pension contribution is
needed to obtain an adequate retirement income? LSE Research Online,  https://www.gov.uk/government/publications/proposed-benefit-and-pension-rates-2018-to-2019

[5] Office for National Statistics, 2018. Trends in self-employment in the UK, https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/articles/trendsinselfemploymentintheuk/2018-02-07