If you are a government trying to get a population to save properly for its retirement, you have two main tasks.
Firstly, you need to get those people who are not yet saving to start. Secondly, you need to get all those who have started saving to save more.
Statistics recently published by HM Revenue & Customs show that successive UK governments have made decent progress on the first, but face a stiff challenge on the second.
They show the numbers saving into personal pensions as well the average amounts being saved. For 2016-17 there were 9.82m employees saving into a personal pension, saving an average £2,310 a year.
This is a rise in the number of savers - up from 8.53m - but a fall on the average contribution - down from £2,310 - and continues the broad trend that has been in place for several years. Namely, that the total number of savers is rising significantly, but the sums being saved are flat - up some years and down in others.
This is explained in great part by auto-enrolment, the policy introduced in 2012 to automatically sign employees up to a company pension scheme unless they opt out. In the period since, the scheme has been expanded from only large employers to smaller ones as well.
The flat-lining average for the amounts saved, however, also reflects the modest contribution requirements of auto-enrolment, which is scheduled to increase contributions to a total of just 8% of qualifying salary from next April but which has required far lower amounts until now.
With auto-enrolment still to bed-in, the Government has resisted increasing the contributions it requires savers to make. This may eventually be necessary if the millions of extra savers that auto-enrolment has brought about are to secure the retirement income they expect.
A quick example shows how much difference even a small increase in contributions can make.
A 30 year-old who begins their pension saving now and retires at 68, their scheduled retirement age, can expect to have built a retirement fund of about £443,000 by making the current average annual contribution of £2,310. That’s with assumed investment returns of 5% after costs and wage inflation (which their contributions will be pegged to) of 3.75%.
If they were to pay in just £50 a month more into their pension the total at retirement, all other assumptions being the same, would jump to about £558,000 - £115,000 and 26% more.
Here are a few checks to make and tips to maximise what you’re paying in to a pension.
- If you have a pension scheme at work you may find your employer is willing to match anything you pay in, up to a certain limit. Make sure you join any scheme on offer and, if you can, contribute enough that you maximise any help on offer.
- Spring clean your finances to get rid of pointless spending on things you don’t need. Can you get a cheaper TV deal? Do you need that gym membership you don’t use? If you can make savings, divert the money into a pension. You’ll be saving more without feeling it in your pocket.
- Increase your pension contributions with pay rises. So, if you get a 3% raise, put an extra 1% in your pension and pocket the rest. You’ll still get a pay rise, but you’re helping your retirement fund too.
- Riskier assets, like the shares from stock markets around the world, are likely to be more volatile but can lead to better returns in the long term. Check out the investment choices of your work scheme for higher-growth options.
The value of investments and the income from them can go down as well as up, so you may not get back what you invest. 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 an authorised financial adviser.