Four out of five people either doubt they are saving enough for a comfortable retirement or just don’t know, new research shows.
Men, homeowners and higher earners are most likely to think their pension savings are on track. Women, renters and people earning less than £10,000 a year are least likely to feel positive.
Many people are also latching onto the minimum total auto enrolment contribution from workers and employers of 8 per cent of earnings, wrongly assuming it is the Government’s recommended amount to ensure you are comfortable in retirement, according to the research by the Pensions and Lifetime Savings Association.
Pension confusion: Four out of five people either doubt they are saving enough for a decent retirement or just don’t know
This mistake was also highlighted in a separate study by Atlas Master Trust, which found 60 per cent of workers think the minimum auto enrolment level represents the amount the Government recommends to achieve enough income in old age.
Unless they opt out of auto enrolment, workers have to put in four per cent of their qualifying earnings – currently between £6,136 and £50,000 – topped up by tax relief of 1 per cent with employers adding three per cent.
How much should you save into a pension?
Pension experts typically say that rather than contributing 8 per cent of earnings under auto enrolment, people should be putting away at least 12 per cent.
One influential report said the UK should set a national target of every worker saving 15 per cent of their salary, including employer contributions and tax relief.
For someone with an employer who will match their contributions, this would mean paying in just under 6.7 per cent of their salary, with their employer contributing the same and basic rate tax relief adding a further 1.675 per cent, to deliver a total of 15.075 per cent.
Attitudes towards saving for retirement
Some 56 per cent of adults are not confident they are saving enough into their pensions to let them live the lifestyle they want in retirement, 24 per cent don’t know and 20 per cent say were saving enough, says the PLSA.
Men are more likely to agree they are saving enough, at 27 per cent compared with 14 per cent of women.
Some 48 per cent of people earning £50,000-plus think they are saving enough, and 30 per cent of people on £30,000-£49,000 are confident, compared with 19 per cent of those on £10,000-£29,000 and 13 per cent of those on less than £10,000.
Homeowners are more confident than renters, at 25 per cent versus 14 per cent.
Some 37 per cent believe the Government has set minimum auto enrolment contributions at a level to ensure that everyone will be comfortable in retirement, 34 per cent reject this and 29 per cent don’t know.
The PLSA surveyed 2,100 adults who are not retired, weighted to be representative of the UK population.
That is on top of making National Insurance contributions towards the state pension, which currently provides retirees with about £8,800 a year if they have paid in enough to get the full rate.
Julian Mund, chief executive of the PLSA, says: ‘The amount a person can save towards their pension clearly depends on their personal circumstances as well as their overall financial circumstances. At the end of the day, it is a very personal decision.
‘However, according to PLSA analysis, at the current contribution rate of 8 per cent, the majority of savers are unlikely to have a good standard of living in retirement.
‘The PLSA believes that the required minimum workplace pension contributions should increase from 8 per cent to 12 per cent of salary by the end of 2030 – with this being funded on a 50/50 basis by the employer and employee.’
Steven Cameron, pensions director at Aegon, says working out how much you need to save to maintain your lifestyle in retirement depends on current earnings, age, when you plan to retire, and any pension funds already built up.
‘For the majority of individuals, the state pension plus a workplace pension built up from minimum automatic enrolment contributions is very unlikely to maintain a pre-retirement lifestyle once in retirement,’ he says.
‘Government analysis suggests someone on average earnings of around £27,000 needs to aim for two thirds of this, or £18,000 in retirement to maintain lifestyle.
‘The state pension is currently £8,767 and automatic enrolment minimum contributions of 5 per cent from employee and 3 per cent from employer paid from age 22 might buy an additional £6,056 from state pension age.’
Cameron says to make up the shortfall, someone who is auto-enrolled at age 22 would need to pay in an additional 4 per cent, while someone with no current private pensions being auto enrolled at age 35 would need to pay in an extra 13 per cent.
How much extra does someone on an average salary need to save to plug the retirement income gap?
Aegon explains: ‘The figures are based on how much it currently costs to buy an annuity using the average of the top three annuity rates from the Money Advice Service annuity comparison tool which on 9 August 2019 suggests a £300,000 fund would buy a monthly income of £767 per month increasing in line with inflation for someone in good health.
‘The figures assume the employee is on an average salary of £27,000, investments grow at 4.25 per cent after charges and earnings grow at 3 per cent per year and price inflation is 2 per cent a year.
‘They also assume the employee is just being auto-enrolled and have no existing pension pot; the older an individual is, the more likely it is they will have some pension savings, which will reduce how much their gap is.’
What can people do to achieve a decent retirement?
The PLSA offers the following dos and don’ts to savers who are worried their pensions aren’t on track to give them a comfortable income in old age.
DO join in your workplace pension if you have not done so already. One of the main benefits of a workplace pension is that your employer has to pay in too.
DO consider whether you could be saving more for your retirement. Also ask whether your employer would match the contributions.
DO ask questions. If you have any questions about your pension pot, such as charges or your investments, your scheme provider will be able to help.
The Pensions Advisory Service is a free and impartial government guidance service. They offer free pension guidance appointments over the phone or local to you. They can be contacted over the phone on 0800 011 3797 or visit Pensions Advisory Service.
DO spend time thinking about how you want to access your money in the lead up to retirement.
Deciding what to do with pension savings is a very complex decision and sometimes you only have one chance to get it right so it’s important to dedicate some time to retirement planning. Consider taking financial advice.
DO make use of the support available when you approach retirement. Pension Wise is a free Government guidance service offered to people aged over 55 to help understand the different options available at retirement.
They can be contacted over the phone on 0800 138 3944 or visit Pension Wise.
DON’T assume that the amount you are saving into a workplace pension is enough. The Government’s minimum workplace pension contribution level is 8 per cent.
DON’T ignore your annual statement from your pension provider. It’s important to read your statements and consider whether you need to take any action as a result.
For example, paying more into your pension, updating your expected retirement age, or consolidating different pension pots into one with lower charges. Read more here about whether it’s a good idea to merge your pensions.
DON’T think that it is too late to start saving. The added benefit of your employer’s contributions, the tax breaks you get from the Government, and investment growth all mean that your money will go further than you think.
Women and pensions
Financial adviser LEBC has produced a guide offering practical tips to women on how to boost retirement savings and help close the pension gender gap. Read more here.
DON’T fall into a scammer’s trap. Be wary if a company approaches you out of the blue – whether over the phone, by email, or in person – and if they make claims of high returns with low risk, or tax loopholes.
DON’T forget to ask about paying into your pension during your parental leave.
Usually your employer will pay in to your pension the same amount of contributions, with you paying in a much reduced amount. Talk to your employer or your pension scheme to find out more. Read more here about what you should do about your pension while on maternity or paternity leave.
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