SAVING enough money to retire comfortably is a tough ask for most of us so it makes sense to maximise any help that’s on offer.
Those working for an employer usually have the option of paying into a pension scheme with additional contributions paid in on your behalf by the company.
How much you’ll get depends on your scheme but, unless you have chosen to opt out of your workplace scheme, the minimum contribution on offer should be 3% of your salary paid in by your employer.
But that’s just the minimum and it may not be enough to provide the kind of retirement you have in mind. If you want a better idea of how much it might take to maintain your lifestyle, you could check out our retirement budgeting calculator to get an idea of whether you will have enough income to live on during retirement. It’s likely to be higher than you might have expected, even if you have been diligent enough to begin your saving at the start of your working life, rather than halfway through as many of us have.
Given all that it’s worrying, if not wholly surprising, to hear that the levels of pension savings inside of workplace schemes have been falling. Figures from the Pensions Management Institute revealed that as many as one-in-five people have or plan to reduce their pension saving to cope with the rising cost of living1.
With bills for essentials continuing to be high - it’s natural for people to look for areas that they can cut back - but targeting retirement saving over other areas could be a big mistake. This is, after all, income that you are forgoing now, in order that it be there for you in the future. You may need the money now, but you’ll also need the money later on in life. Some might have no choice but to lower their pension saving now to get through, but others should look elsewhere for savings if they can.
And bear in mind that cutting your pensions contributions may not save you as much as you think. Tax relief means that what you pay in, is boosted by the taxman, but that also means contributions are worth less, as take-home pay than they are within a pension - although they will be taxed when withdrawn in retirement.
For example, stopping a £100 contribution to a pension would save you only £80 in take-home pay. If the contribution was made inside a workplace pension with the minimum contribution level, you would also be missing out on £75 from your employer too. This example is for a basic tax rate payer. The basic rate of tax is charged at 20% of all of your taxable income.
If you are in the happier position of being able to maintain, or even increase, your contributions - a good way to do it in a relatively painless way is to set automatic increases to your contributions on a specific date at certain times of the year. For example, increasing the proportion of salary you pay into a pension whenever you get an annual pay increase or a promotion.
It even works with modest annual pay rises. If you get a 3% increase in pay, keep 2% but add the other 1% to your pension contributions. It could add thousands to the pot you eventually retire with (this is not guaranteed) but, because you’ll still have some extra money landing in your bank account each month, you’ll barely notice the difference.
Source - Professional Pensions 28.12.22
Important information: Tax treatment depends on individual circumstances and all pension and tax rules may change in the future. You cannot normally access your pension savings until age 55. This is due rise to 57 in 2028. This information is not a personal recommendation for a particular course of action. If you are unsure of the right approach for you personally, you should speak to an authorised financial adviser of your choice.
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