Here, Nic Redfern, Finance Director at NerdWallet, discusses the benefits of workplace pensions
Saving for retirement is sometimes not our biggest priority. With more immediate pressures on our finances, it is tempting to delay our pension contributions, thinking that there is plenty of time to start planning for our future.
However, recent findings indicate that many of us should prepare more for our retirement. Several surveys have highlighted a gap between the lifestyle that people want in retirement and the actual financial plans and pension savings they have in place, showing that a significant proportion of individuals underestimate how much they need to save for retirement.
You can use the pension calculator from the Money Advice Service to work out your estimated retirement income and see if you are on track to fund your retirement goals.
Workplace pensions are just one of the types of pensions that you can save into, which employers are obliged by law to set up and contribute to.
To encourage more people to start saving earlier for their retirement, auto-enrolment on workplace pensions was introduced in 2012. Now, every employee over the age of 22 years old and earning more than £10,000 (for 2019/20) will automatically be enrolled on their workplace pension scheme, although they can opt-out if they wish.
Auto-enrolment makes it easy to start saving in a pension scheme, but is it worth having a workplace pension? And what are the benefits of a workplace pension scheme compared to a personal pension or other forms of savings or investments?
To afford retirement
Some people may think they will be able to live off their State Pension and so won’t worry about investing in a pension scheme. However, the maximum State Pension amount is smaller than many expect as it stands at just £168.60 per week, or £8,767.20 per year.
This is much lower than the average worker’s income and is below what many people hope to live off in retirement, so most individuals will need to have another source of income, such as a pension plan, to ensure they can fund their lifestyle once they finish working.
Furthermore, you will only be able to access your State Pension from a certain age (depending on when you were born), so if you plan to take earlier retirement you will need a way of funding this.
To start saving early
Without the structure of a workplace pension, many of us may not start saving for our retirement until it’s too late. If you don’t start saving until your 30s or 40s for example, then you will need to put aside a much larger proportion of your income to make sure you have enough funds for when you retire. Even then, you may find you still have a shortfall between the funds you have and what you actually need to live the lifestyle you want.
It is easy to only think of our current needs, especially for younger people for whom retirement can be over 30 years in the future. However, the earlier you start saving in a pension fund, the more time your money has to grow, although it is not guaranteed to increase in value.
Your employer will pay into the scheme
One feature that sets a workplace pension apart from a personal pension and other saving options, is the contributions that employers are obliged to make. The total minimum contribution to your pension is currently set at 8% of your qualifying earnings, made up by employer contributions of at least 3%. This would then leave you to pay the remaining 5%.
Some employers may contribute more than this but, whatever the exact terms of your own employer’s scheme, it is certain that you won’t get the benefit of these extra payments if you don’t have a workplace pension.
This is why the Money Advice Service says opting out of a workplace pension scheme is “like turning down the offer of a pay rise.” So, unless you have more pressing priorities that mean you need every penny (such as paying off unmanageable debt), then saving into a workplace pension will offer long-term benefits that other savings options don’t provide.
Take advantage of tax breaks
Saving into a workplace pension means you qualify for tax relief. This may happen via a ‘net-pay’ arrangement (when your pension payments are deducted from your gross, pre-tax income) or via a ‘relief at source’ arrangement (when the pension provider claims back tax relief from the government). Whichever method your scheme uses, some money will go into your pension that would otherwise have gone to the government in the form of tax.
In 2019/20, the annual allowance that you can save across all your pension schemes without paying tax was set at 100% of your annual earnings or up to £40,000.
Additionally, when you finally come to use your pension, you can take out up to 25% of your savings tax-free.
Flexibility
Over the years, workplace pensions have become more flexible and allow you to access your funds in a number of ways, usually from the age of 55. For example, you can take out all of your savings as a lump sum; take out chunks of the money as you need it; take an income from your pension fund while it remains invested (known as income drawdown); or purchase an annuity, which will give you an income for life.
It is worth assessing your options and looking for guidance from impartial and qualified sources to make sure you get the right option for you.
Help with managing your pension
Unlike if you manage your own savings and investments, your employer and pension provider will arrange your contributions. For example, rather than you being responsible for allocating a proportion of your income to save in a personal pension, your employer will automatically take it from your salary before you receive it.
Furthermore, your pension provider will invest your money for you. Although you can often choose how your money is invested by the pension provider, most schemes also have a default option that they will invest your funds into if you don’t make a choice yourself.
However, you choose to manage your pension, saving into a workplace pension scheme can help you to prepare for retirement and provide you with an additional source of income after you finish working.
Third-party data provided is based on information that is publicly available at the time of writing. Know Your Money does not accept, for any reason, responsibility for the content on third-party sites. This article is intended as an informational guide, but does not, in any way, extend to giving advice. Tax benefits and returns will depend on both product and individual circumstances. Pension advice should always be sought from a qualified professional who is regulated by the Financial Conduct Authority (FCA).
