The threshold for minimum pensions contributions recently increased, with both employers and employees required to put more into pension pots for retirement. From the 6th of April 2019, the minimum contribution rose to 8%, with employers contributing 3% and staff paying 5% of their salary. However, recent sources have suggested that – even with this increase – it is no longer viable to simply continue putting small amounts of money aside to comfortably provide for your old age. With the age to claim State Pension being steadily pushed back, it’s good to keep an eye on when you’ll be able to access your retirement savings. While we’re not independent financial advisors – and can’t advise on pension investments – in this blog we will look at different ways to plan for your pension, increase your financial security in retirement, and what retirement might look like in the future for the workforce of today. No matter how near or far your retirement day is, it’s a good idea to have a plan for your pension.
Let’s say you have a workplace pension, to which your employer makes contributions. You don’t have a plan for your pension, and you’re on the fence about even saving the minimum requirements into your workplace pension. Due to auto-enrolment, more people now are paying into a personal pension than at any other time in the UK. While this is great news, there are a lot of articles out there telling us that even the recently increased minimum contributions aren’t nearly enough to sustain a comfortable lifestyle in retirement. If this is the case, then why bother? If your savings won’t be enough for the future, then why not just opt out of the pension pension and enjoy that money now in the present? Well, while this seems tempting, and while it’s unfortunately true that the minimum contribution requirements alone may not set you on track for a comfortable retirement, some money is better than no money. While we are not financial advisors, we are pretty confident in this point. Even if you can’t currently set aside the sums that will guarantee you an easy retirement, setting your future self up with some money is far rosier than the alternative. Also, remember that – with employer contributions and government tax relief – if you opt out of your pension scheme, you are essentially turning down free money. Free money that will gain better interest than most of the offerings from high street bank accounts.
As most pensions and any long term savings benefit from the effect of utilising compound interest, it makes sense to put some money away as early as you can. Compound interest is essentially when you gain interest on your savings, and then start to gain interest on that interest. The earlier you plan for your pension and pay in money, the more money can be made through interest. In the short term this yields slow results, but – over the course of decades – the value of the returns can be massive. The benefits of contributing earlier could also grant you some relief later on. It can be difficult to consider sacrificing some of your salary to a pension for your future, when that money could be put to use now in your present. For example, people trying to get on the housing ladder might see putting all of their available salary towards buying a property a more worthwhile investment for their retirement than contributing to a pension pot they can’t access for decades. However, it’s really important to at least consider contributing what you can to your pension pot if you want to live comfortably when you retire.
Working out the cost of the standard of living you expect in your retirement can help you plan for your pension, and work out roughly how much you should be putting away. Then you can work out how feasible that amount is alongside your other goals. You can use a pension calculator like this one to estimate what income you will receive from pension contributions and the State Pension when you stop working. Everyone will be different, but taking some time to tot up how much your expected lifestyle will cost will really help you get your head round pensions and your contributions. For example, if you own your own home, then you won’t need to factor in renting costs to your lifestyle, but you may want to budget some money towards home improvements. If, on the other hand, you don’t own your own home, then you’ll need to factor in renting costs to your monthly fees. If you live in an expensive area, or if you’re planning to move somewhere remote where you won’t be able to rely on public transport, are both considerations to take into account. With no paid work, would you be able to keep up rent or mortgage payments? Would you be able to afford your current lifestyle, along with any potential dependents? A 2018 study showed a sharp contrast to the expectations and realities of retirement with people in a pre-retirement stage of life estimating that their living costs would come to 38%, and those already in retirement found that these costs came to 53% of their outgoings. If you plan for your pension in advance, you lower the chance of nasty surprises.
One idea put forward to younger people looking to safeguard their retirement is to gradually put more and more money away in proportion to their age as they get older. By starting as early as possible they can best utilise compound interest over the years. In my own experience as a 22 year old, this method means that I would have at least 11% of my salary put towards my pension. A 30 year old would contribute 15% of their salary, a 40 year old 20%, and so on. This figure is inclusive of employer contributions and tax relief, so – assuming a 3% employer contribution – a 22 year old would really only be contributing 6.4% of their salary, and a 30 year old only 9.6%. In a perfect scenario, this is meant to be a base level to progress with as you age, and your salary (hopefully) increases. Of course, this will not be universal for everyone’s experience, but it gives a rough idea of how your contributions to your pension might work as you get older. If you can, plan for your pension and speak to your employer about increasing contributions – maybe they’ll match it!
Clearly, self-employed people can miss out on employer contributions. Like anyone else, self-employed people will still receive the State pension based on their National Insurance contributions, but irregular income patterns can make regular payments to a personal pension seem difficult. Almost two-thirds of self-employed people – around three million people – are not saving into any form of pension scheme. Due to long periods of awaiting payments, which in turn lead to cash flow issues, it can seem daunting to invest your hard-earned money in a future that seems so far off. Nevertheless, it’s a far less daunting process than becoming too old to work and having nothing stored away. The best option for self-employed people is to pay into a private pension and continue to make use of tax relief from HMRC through their pension provider.
Some people advocate the idea that while being self-employed gives you a greater degree of independence than traditional work, the best option is to be independent altogether. The FIRE (Financial Independence, Retire Early) movement is a growing idea of how to maximise savings in order to be in a position to retire from paid work as early as possible. Simply put, the FIRE movement advocates for saving at least 50% of your income, and putting this money into investments that will work for you over the years. Obviously this tactic is simply not feasible for a lot of people. Depending on where you live, your housing costs will be taking a toll on your salary. For instance, in Scotland on average your housing costs are going to cost you 25% of your salary. In somewhere like London, people can find that they are spending 49% of their salary on simply having somewhere to live. Proponents of FIRE, however, would suggest that you need to adjust your life accordingly to live on 50% of your salary, and put the other half away for your future. There’s a growing amount of support for this movement, as a large part of their ideals stem from rejecting current consumerist trends and living as simply and happily as possible.
There’s a lot of speculation around how retirement will look in the future. With an increasingly healthy and longer-living population, the standard retirement age will most likely be pushed back. Additionally, with State pensions no longer being estimated to be “enough” to maintain the costs of living, retirement as we know it may become obsolete. Perhaps people will retire, but then work one or two days a week in a new role. Perhaps they’ll continue in a consultancy role in their original field. Perhaps they’ll move in with their kids or families and hope to be supported! There is no clear, one-size-fits-all way to predict what your situation will be like when the time comes for you to retire, but if you can afford to sacrifice some of your salary now to fund your lifestyle in the future, there’s still time to do just that. Pensions are an extremely tax-efficient way of saving your money, so if you are in a position to save and plan for your pension, it’s most likely a good choice to do so.
Brett Nicholls Associates are not financial advisors and cannot and do not advise on pensions or other investments. To learn more about our accountancy service call 0141 334 1318 or email us at firstname.lastname@example.org