Auto-enrolment has been in place for some years now. With so many people not saving enough in their private pension funds, the auto-enrolment initiative was introduced to encourage people to save for their retirement and not rely on a state pension. From April this year, there will be an extra increase in automatic pension contributions: a minimum of 5% will be taken from people’s salary if you are over 22 years old and earn over £10,000 per annum.
What are the benefits of auto-enrolment?
Auto-enrolment or workplace pensions are a great way to encourage younger people to save sooner. Over 20% of under-35s have saved nothing into a pension (1). Although paying off the student debt or saving for the first home is understandable, for pension contributions it’s a case of the earlier, the better. Like any investment, the longer you have a personal pension invested, the more money you can potentially earn. According to the BBC, paying into an auto-enrolment pension from age 25 can potentially look forward to a post-retirement income of up to £18,000, plus a full state pension.(2) This adds up to over £26,000 – the figure that Which? currently recommends for a comfortable retirement. (3)
Are there any disadvantages?
Some argue that the increase in personal contributions will be difficult for those on low income – although it is timed for April, when people may receive a pay rise. A hidden problem, though, is becoming complacent. Auto-enrolment does not mean you can put retirement planning to the back of your mind, and it does not, in itself, guarantee you a comfortable retirement. This is especially the case for those aged over 40, who may not have been saving for long enough for this to build up to a decent figure. Although the extra contributions will give you some extra money, this may not be enough.
What can I do?
It’s always a good idea to carry out a pension check to help with your retirement planning and ensure your personal pension will give you what you need. There are budget planners available to help you work out how much you need to retire. You can also check your old workplace pension, as moving it into the new workplace pension scheme could help it to grow more quickly. If you are on a defined contribution pension, increasing your contributions even by a small amount could add up to big gains in the long term. Merging pension pots – also known as pension consolidation – can also be beneficial, to avoid hidden fees or ensure you get the best rate. You can also look into other forms of investments such as an ISA.
An independent financial adviser, regulated by the FCA (Financial Conduct Authority) like us at Pension Works are the best people to help check your pension. As well as advising you on your current pension fund, they will also be able to help in your retirement planning. They’re not just pension advisers, as they consider your other savings and investments, personal circumstances. They can advise you on how much you will realistically need to retire and suggest any changes that might be needed to help you achieve these goals.