Is Your Pension Big Enough?
20.08.2019 by Jack H
Saving for retirement is something that everyone is aware of, but many people don’t worry about it until later on in life. Having a pension ready for retirement is vital, not only for security and peace of mind for the future but for the quality of life you could receive when you do retire. A lot of people are still unsure about the amount of pension they need.
We answer the commonly asked questions about pensions
How much pension do I need? Will my retirement pot be big enough when I need it? How much should I be putting away for retirement?
It is not always so straight forward to know exactly how much pension you need. Everyone’s life and financial situation are different; therefore, there is no set answer to this. For the younger generations, who knows what the future holds and what the world of pensions will be like once retirement age is reached. However, the simple approach to bear in mind is to try to save as much as you can possibly can.
The key is to keep in mind that retirement can last for around 30 years (or longer!) depending on your health or the age you stop working.
Our guide below shares several factors around pensions, providing guidance around saving and tips to follow.
When should I start saving for retirement?
The obvious answer here is as soon as possible. The most recent state pension is £168.60 per week (as stated by the government). If you multiply this figure by 52 (weeks of the year), it brings out an annual earning of £8,768.
Use that figure as a ballpark amount to understand what you need to be adding to this each year to live comfortably. As the current retirement age is sitting at 65, the state pension fund does tend to rise a little each year due to inflation, but only ever so slightly.
It is advised to start saving for your pension as soon as you are in employment and are receiving a regular income. To live comfortably, students who graduate should look at saving for retirement when in their first full-time job. Those who didn’t go to university should start contributing to their pension fund as soon as they feel comfortable to put an adequate amount into their pension provider.
What is an auto-enrolment pension?
One of the most positive outcomes over the last few years is the introduction of auto-enrolment. This scheme came along in 2012 and is now one of the main reasons there is an increase in people saving for their retirement.
When the scheme was introduced, it brought in a new procedure that employers must automatically enrol eligible employees who are working for their business or company into a workplace pensions scheme. Therefore, it is now an automatic requirement for anyone working for a company (this doesn’t affect the self-employed) to contribute to a pension.
For our current tax year 2019/20, the lowest requirement employees must pay in is 5% of their wages and employers at least 3%. Of course, if you want a secure and comfortable retirement, it is beneficial to be saving more than the required minimum amount.
Remember that how much you choose to contribute to your pension is all determined by the amount of income you desire when you are retired. The more income you want, the more you need to be putting away.
If you wish to get an idea of how much you need to start saving for your pension for a reflection of how retirement will look, consider the following steps:
Step 1 - If you don’t already know, ask your employer who your working pension scheme is with. Ask to have an update on what your pension pot is looking like to date. Pension providers do have yearly statements; however, your employer will be able to access more information for you if you need this at another time.
Step 2 -Asses how much pension is currently in there, and what figure this brings annually. If you can view an annual figure, do some sums with your current numbers. You’ll soon be able to see if you are putting in a sufficient amount monthly, or if you feel this needs increasing. There are many pension calculators online, which can help you with doing the maths.
Step 3 - Check out what your current State Pension offers. As mentioned above, the 2019/2020 pension is £168.60 per week. Work this State Pension figure into your own pension contribution figures, which will give you an idea of whether you need to increase your contribution.
Step 4 - Think carefully about any other income you receive now outside of your main employer, or if there are other ways you may receive extra income when you are retired. For example, by the time you retire, a home you may have paid off might be on the rental market. Use this opportunity to have a solid think about income methods for the future.
If you’re reading this and are feeling slightly worried that you may not be on track for your desired retirement pension, there is still time to make a change.
Here are six top tips for working with your pension savings.
- Join Your Company Pension Scheme
Thanks to auto-enrolment, there isn’t a way to avoid this, but some larger companies will automatically put you on the lowest percentage and leave it up to you to change. This is where some of us can leave it how it is, and not think about upping the current contribution. Aim to pay in more than the minimum contribution limits. As the current minimum is 5%, try to double this to a 10% contribution to start with, and see how you go on. If you do this as soon as you join a company, you won’t miss the money, to begin with.
- Think About Self-employed Pensions
The above doesn’t apply to those who are freelance and self-employed, whether you have set yourself up as a sole trader or a limited company. As soon as you make this career change, look at setting up your own personal pension if you don’t have access to a company scheme. The unfortunate news here is that those who are self-employed don’t get the benefits of employer contributions, even with a self-employed pension.
With this in mind, it’s even more vital for those who work for themselves to start thinking about retirement and pensions as soon as possible.
- Get professional advice
If you’re unsure about your financial situation, don’t be afraid to seek pension advice. It can be confusing to understand if you are currently saving enough, plus the added confusion when you leave a company and move to another. More often than none, for those who move companies, you may have pensions in different pension provider schemes.
If you’re feeling a little out of your depth around how much you should be saving, or where to locate your previous pensions, do seek professional advice. It could have a significant impact on the future of your retirement income if you don’t iron out any worries or concerns early on.
- Don’t rely on State Pension
It’s common for people to rely on the State Pension, making the mistake of thinking that what it will provide will be enough to give you a comfortable retirement. This is not the case. The age in which you become able to start receiving the State Pension is getting pushed back more often, meaning the age you retire is all based on uncertainty. As it stands, the State Pension age is said to increase from 67 to 68 in 2037-39, which is a whole seven years earlier than it was previously planned to increase.
This change will have a significant impact on those who are currently in their late 30s and 40s in today’s present year (2019).
- Work to Retirement Goals
The earlier you plan your retirement, the more in control you will be to create a retirement life you can be happy with. Do your sums and assess carefully precisely how much you will need for retirement. Set Yourself Pension Contribution Limits
It’s one thing being savvy about your pension, but make sure that you are aware of pension contribution limits and stay within them. For the 2019-2010 tax year, you can contribute into your pension a maximum amount of £40,000, or 100% of your salary (whichever option is the lower one) and still get the advantage of tax relief.
There is also a set Lifetime Allowance amount for the 2019-2012 tax year, which sits at £1.055m. This amount is the maximum you can save into your pension without facing additional charges for tax when you withdraw the money.
If saving for your pension feels a little overwhelming, just bear in mind these three factors: save young, save smart, and save more.
The earlier you start, the better off you will be. The smarter you are with your own personal savings, with the use of ISA’s, stocks and shares, for example, the better your financial situation will be. Lastly, save more! Those pension contributions should be higher than the minimum contribution to save for more comfortable retirement life. After all, retirement arrives quicker than you may think.