More people in the UK are saving into a pension scheme than ever before, thanks to the introduction of auto enrolment in 2012. In 2017, 73% of UK employees were contributing to a workplace pension compared to less that 47% in 2012. On the other hand, 1 in 8 Brits who retire in 2018 will do so with no pension savings at all and only 25% of self-employed workers are saving into a pension. Pensions can seem complex, but there are some simple ways to make sure you get the most out of your savings.
Why save for a pension?
Although will many of us qualify for a state pension, this will only cover basic needs (find out about eligibility on the Government’s website). To have the standard of living you want in retirement it’s a good idea to start saving into a pension scheme. Plus, pension schemes will also come with some tax relief, so you’ll put more away for a rainy day than if you rely on savings alone.
Start saving early
Even if you’re in your 50s you can still create a good pension pot, but it’s going to be larger if you start at 30 or 40 (or before!).
If you have a pension income of £25-30k you are likely to live 1.5 years longer than somebody with £10-15k. This link, which largely reflects the connection between wealth and life expectancy, has been quantified through data held by Equiniti, the UK’s largest pension scheme administrator.
Do your maths
Have a think about how much money you’ll need to have when you retire. What expenses will you need to cover each week? Are there any hobbies you’d like to take up or carry on with? We have a handy budgeting tool that can help you with this.
It’s also a good idea to try and pay off your debts before you enter retirement. You can find out more about this on our dealing with debt blog post.
Then, work out how much of these will be covered by your State Pension. But be aware that this has changed in recent years. You can find lots of information on MoneySavingExpert’s State Pension pages.
Have a look at how much you pay into your pension each month, plus any pots you may have from previous jobs. Also include any savings accounts, ISAs or investments that will contribute towards your income. You can work out your likely retirement income on the Money Advice Service’s Pension Calculator and see if you’re on track to achieve your goal.
Put more away
If you’re in an auto-enrolment pension scheme that’s a great start. Current employee contributions are set at 3% minimum which will rise to 5% next year and should give a good basic level of income. Depending on your age and how much you earn you may want to contribute more than this to increase your earnings in retirement. If you get a pay rise or a bonus, consider adding some to your pension pot. You’ll get tax relief on your contribution and – on some workplace schemes – your employer may increase their contribution too.
Treasure your final salary pensions
If you are lucky enough to have a final salary pension or defined benefits scheme – one that pays out a set amount each month depending on how long you worked for an organisation – then it’s generally a good idea to keep them. They will offer you a guaranteed income and do not come with the financial risk of other schemes.
Avoid the temptation to dip in early
Your pension could be a lifeline in later life, so try to avoid drawing out of it early, even if you’re still young. What you take out could take years to build up again. If you’re struggling financially, you can turn to us – our free confidential helpline (08081 311 333) and online chat are open Monday-Friday, 8am-8pm.
If you’re self-employed
Although the number of self-employed people in the UK is rising, fewer and fewer are saving into pensions. Some plan to sell their business to pay for retirement, but if this doesn’t work out as planned they can be left without financial security in later life. Others may put it off because of the expense. However, there are schemes in place to help self-employed people save:
- As a self-employed person or single person director, you can use the National Employment Savings Trust (Nest). This is a low-cost government pension plan set up to help employers without a workplace scheme
- If you are saving for a pension, you can claim back some tax relief via your self-assessment tax return. If you’ve forgotten to do this, you can still claim tax relief from the previous three years
- You can find plenty of advice on different types of schemes through the Money Advice Service.
If you’re near retirement
If you’re thinking of retiring soon, it’s a good idea to take the time to think about the options available to you. The Money Advice Service has information on the different ways you can take your pension. We also have a brochure on life after work that gives helpful tips on making the most of your finances.