Six years of auto-enrolment: six reasons to save for your pension
Auto-enrolment was first introduced in October 2012, making it compulsory for employers to enrol eligible staff into a pension scheme.
It was phased in over a six-year period, with the largest employers starting first, before trickling down to the smallest and newest firms by February 2018.
To date, nearly 10 million people have been auto-enrolled, saving some of their monthly pay cheque for later life.
If you’ve started a new job, previously opted out of auto-enrolment or want to know why you should be saving for your retirement, here are six reasons highlighting the benefits:
1) Your employer contributes too
Under law, your employer must contribute to your pension. So if you opt out of auto-enrolment, you’re missing out on ‘free money’.
The auto-enrolment contribution rates for both employees and employers rose in April this year. The current contribution stands at 5%, made up of 3% from the employee and 2% from the employer.
The rates are set to go up to 8% in April 2019 – 5% from the employee and 3% from the employer.
As an example, someone earning an average salary of £28,600 will contribute £542, but their employer will contribute £451 (based on 2018/19 qualifying earnings figure of £6,032). See YourMoney.com’s Auto-enrolment guide for more on this.
2) Your contributions gain tax relief
As well as receiving employer contributions, you can get tax relief on your pension contributions at your normal rate – 20% for basic rate taxpayers and 40% for higher rate taxpayers. If you’re a higher rate taxpayer, you need to claim the extra 20% as part of the self-assessment tax return process.
For example, an employee pays in £800 and the government adds £200 for basic rate taxpayers. But for higher rate taxpayers, you can claim an extra £200 as part of the tax return so a £1,000 pension pot would only cost £600.
Taking into consideration both the employer contribution rate and tax relief, this is how your 5% pension contribution is broken down:
- Employee: 2.4%
- Tax relief: 0.6%
- Employer: 2%
Again, based on the average salary of £28,600, the employee contributes £542, the employer contributes £451 and with tax relief coming in at £135, this means a basic rate taxpayer only has to put in £542 to gain £1,128 in their pension pot.
3) You don’t have to rely on the State Pension
Critics and experts have long suggested the UK is heading toward a State Pension crisis. With longevity on the up, fewer lucrative defined benefit pension schemes and more pull on government coffers, the State Pension is buckling under the pressure.
The pension retirement age has already been increased and in April 2016, the new State Pension was introduced. This saw the launch of a single tier pension, currently at £164.35 per week (£8,546.20 a year).
The years of National Insurance contributions or credits needed to qualify for the full basic State Pension rose from 30 to 35 years under the new system, with anyone showing less than 10 years on their NI record not getting any pension at all.
While the weekly amount is likely to increase in the years ahead, ask yourself whether you could manage all your bills and outgoings on this modest sum.
4) Default fund choice if you’re unfamiliar with investing
It may be daunting having to choose where your money will be invested as part of your retirement pot. But many pension schemes include a default or pre-selected fund depending on your attitude to risk.
This may take some of the stress away from savers who are unfamiliar with investing. However, last year, research from The Pensions Regulator suggested that by sticking to the company’s default pension strategy, savers in the worst funds could be missing out on thousands of pounds by the time they reach 55.
As such, it may be worth taking advice on your investments to ensure you’re getting the best returns on your retirement funds.
5) Access your pension money earlier than the state retirement age
Currently to benefit from the new State Pension, men need to be born after 6 April 1951 while for women, they’re eligible if they’re born after 6 April 1953.
However, under Pension Freedoms introduced in 2015, anyone aged 55+ can access their private/workplace pension pots. If savers want to, they can withdraw their whole pension pot money (subject to tax).
With the State Pension, retirees will gain the government benefit a decade later (65 for men and women as of 6 November).
6) Paying in an extra 1% could add £60,000 to your pension pot
Analysis by Fidelity International found that a 30-year-old today earning £30,000 could save an additional £58,273 by the time they reached 68 by increasing their pension contributions by just 1% (based on 3.75% wage growth and 5% investment returns after fees). This means paying in just an extra £6 a week.
‘Get into the savings habit early’
Kate Smith, head of pensions at Aegon, said: “Six years of auto-enrolment and edging towards the 10 millionth auto-enrolee, the government initiative has been a game changer. More people are saving in a workplace pension, but many aren’t saving enough.
“So that employees stand a chance of retiring when they wish to and achieving the retirement income they aspire to at the very least they should be taking up the offer of free money provided by their employer and government and getting into the savings habit early.
“The auto-enrolment minimum contribution, currently 5% of a band of earnings isn’t likely to be enough for most people, over their working lifetime and as a result they should be aiming to save between 12% and 15% a year of their earnings into a pension, including the employer contribution. The more people save, the more choices they will have in later life.”