Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
Getting us all to save more for our futures is one of the biggest challenges government policymakers face.
Our systems for taking care of those in old age were designed in an earlier era, when retirement lasted just a few short years and most people could rely on well-funded Defined Benefit pension schemes that would provide an ample income.
The demise of those schemes and the fact that we’re all living much longer means more of us face financial insecurity once we stop work. Our retirement incomes are more likely to rely on the savings we make for ourselves and those extra years of life raise the chances that we will require expensive social care in old age - a problem that successive governments have failed to fix.
Given that rather pessimistic backdrop, we should celebrate retirement policy successes when they come along. One such success is undoubtedly the programme to automatically-enrol most employees into a workplace pension scheme, which started in 2012. Prior to the introduction of auto-enrolment, it was up to individuals to decide to opt into their scheme, if one was made available. That obstacle meant many people never got round to it.
New figures published by the Office for National Statistics today show what a difference auto-enrolment has made. They show that in April 2020 nearly eight out of ten UK employees (78%) had a workplace pension compared with less than five out of ten in 2012 when auto-enrolment was introduced.
That still means there are significant gaps, particularly among younger workers and those earning below the minimum earnings threshold for auto-enrolment, but the progress being made is clear.
What the figures don’t tell us, however, is that many of those enrolled into their pension are still unlikely to be saving enough to give them the retirement they hope for. The current rules mean that a total of 8% of salary is contributed to a pension under auto-enrolment - 3% from the employee and 5% from the employer. Yet many experts would regard this level of saving as insufficient.
Fidelity’s own calculations suggest that, even for a young person with many years to save, the level of contributions would need to be much higher - perhaps as much as twice the minimum under auto-enrolment.
Based on a target of achieving a retirement income that is at least 55% or your pre-retirement income, and assuming that both you and a partner go on to secure full state pension entitlements, Fidelity’s research suggests a 25-year-old would need to save 13% of their salary into a pension. 1 And that 13% quickly rises is you wait longer before starting a pension - the same calculation for a 35-year-old results in a recommended 18% contribution.
Figures like that can be daunting if you’re struggling to save for other priorities, like young children or buying a home, but they may not be as hard to achieve as you first think. For a start, pension contributions benefit from tax relief, which means they cost less to you in terms of take-home pay. A £1 contribution today costs you 80p if you’re a basic-rate taxpayer and more relief is available if you pay higher rates of tax.
And if your employer offers to match contributions that you make, maximising your contributions to make full use of any help that’s available can also make the job of hitting your target easier.
Finally, if you still find that you’re struggling to contribute enough, try upping your contributions slowly, timing the increases with any pay rises or promotions you get. If you get a 3% pay rise one year, keep 2% but divert the remaining 1% increase into your pension. That way you’ll still see more going into your bank account each month, but your pension contributions will be rising too.
1 Fidelity International, May 2021
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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