We are all having to prepare better for our retirements. Each year the Pensions and Lifetime Savings Association releases a report on the cost of living for those in retirement. In its most recent survey it highlighted that a basic retirement would cost someone £12,800. If you’re living together as a couple this is £19,900. Meanwhile the full New State Pension will provide an income of £10,600 this tax year.
So a state pension will barely cover your living costs if you live alone, and provide a couple with some change for special treats. And the more you want from retirement, the more it will cost. An illustrated summary of the association’s findings is shown below.
This is why it is important that we all think carefully about how we want to spend our retirements and how we will fund this lifestyle.
What is auto-enrolment?
In the past many companies offered employees the opportunity to save into a pension fund to help them prepare for their retirements, but many did not. To enable and encourage more people to save, in October 2012 the government introduced automatic enrolment (“auto-enrolment”) legislation that forced all employers to provide a pension scheme to their workforce. Employees were automatically enrolled if:
- They weren’t already part of a qualifying workplace pension;
- They were aged at least 22 but below the State Pension age;
- They earned more than £10,000 (in the current tax year);
- They worked in the UK.
There were exemptions for businesses with less than 10 employees and for those whose only employees were directors of the company.
The current auto enrolment thresholds mean that if you earned between £6,240 and £10,000 per tax year, you could ask to join the scheme (and the company would have to let you) but you would not be signed up automatically. But these rules could change soon, as we explore below.
What are the new auto-enrolment rules?
While the bill still hasn’t passed into law yet, we expect there will be two changes to the auto-enrolment rules: the minimum enrolment age will be reduced to 18, and the lower salary limit of £6,240 will be removed.
The past rules meant that many people were excluded from having the opportunity to save towards their future wellbeing. This was especially true if you worked part time and/or were on a low salary. The reasoning was sound enough: saving for the future could affect your current lifestyle if you were a low earner. But this generally impacted women more than men and raised fears that women were being indirectly discriminated against.
What do the auto-enrolment rules mean to me?
If you are already part of a pension scheme, you won’t notice any difference. But if you are not currently covered by the regulations you will notice a 3% reduction in your monthly pay which goes towards your auto enrolment contributions. While its only three pence in every pound, this might make it difficult to manage your household budget until you get used to it.
You can ask to opt out of the company’s scheme, but if you do this you will miss out on the company contributing a further 5% to your pension savings account and this might not be in your best long-term interests. You can ask to opt out at any time and rejoin later when you feel more comfortable with the payments. Your employer will be required to re-enrol you every three years anyway, so you can reconsider your decision then.
Why is it a good idea to save into a pension scheme?
The changes to the auto-enrolment rules are good news to anyone who is worried about their retirement lifestyle. There are several principles that apply when investing for the future:
- Starting as early as possible gives you as much time to reach your goals as possible. Lowering the starting age from which pension savings are offered is a great example of this. If you are aged 18 today you may be investing for 50 years or more, and you’ll benefit from many years of potential growth. And the power of compounding can mean that every year you earn returns on the previous years’ growth.
- Investing a small amount regularly can help you smooth out the ups and downs of investing. You might buy shares when they are expensive, and you might buy shares when they are good value. But by buying investments at a variety of prices over the year you can be sure your total portfolio was bought at the “average” price.
- Investing tax efficiently means you get to keep more of the returns. Pension accounts are the most tax efficient way of investing. All the while your investments are held in the portfolio any returns are free from capital gains and income tax. There is also a great degree of freedom when it comes to withdrawing from your pension savings, including the option to take 25% of the total pot tax free. Including 25% of all that potential growth.
- Making the most of your tax allowances to save as much as you can afford. If you’re joining a scheme or already part of one and think you can afford to put away a little more each month, speak to your employer about making additional contributions. Some companies will match them to a maximum amount which is a welcome boost.
- Making sure your investment portfolio maximises returns for your level of risk. When you join the scheme, you might be offered a range of funds to chose from. Think about how long you’re likely to be invested and how happy you are taking risk. Generally speaking, the longer you remain invested the more risk you can afford to take. Although that isn’t the same as being happy taking that risk.
Auto-enrolment – or any company pension plan – should be an important element of everyone’s retirement planning, and it should always be a priority to receive as much pension contribution as you can from your employer. It could make a huge difference to the type of retirement you might be able to enjoy. Most employers offer funds with lower fees and charges than you could find if you wanted to invest in a personal account. Over time, this difference in fees can make a difference to your total returns.
The changes to the automatic enrolment rules mean everyone now has the chance to build a better retirement and that is something to be welcomed.
If you’d like to put away more for your retirement, consider opening a self-invested pension plan (SIPP). It’s a personal savings account where your investments can grow tax free but you’ll have a wider range of investments to choose from. You can invest up to 100% of your earned income or £60,000 (whichever is the lower) each year and you can claim income tax relief on your contributions.
Would you like to speak to someone about retirement income, or are you looking for wealth management support? Request a call back from one of our financial professionals who can help you find the service to suit your needs.
The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits which isn't guaranteed and can do down as well as up. The benefits of your plan could fall below the amount(s) paid in.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
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