The latest figures from the Pension Regulator prove that pension auto-enrolment has been a success – more people than ever are saving into a pension. Yet, research also shows that many people don’t think they know enough about saving for retirement.
Before the government introduced auto-enrolment in 2012, just 4 in 10 private sector workers were actively saving into a pension. Now, more than 70% of employees are taking steps to secure their retirement.
According to the Office for National Statistics, pensions represent the largest portion of private wealth in the UK. Individuals hold £6.4 trillion in pensions. The figure compares to £5.5 trillion in property and £2 trillion in cash.
The number of people saving for retirement is rising and the accumulated wealth in pensions is certainly good news, but simply paying into a pension isn’t enough to be sure of a comfortable retirement.
Engaging with your pension and understanding how it’ll create an income when you retire is crucial, and research suggests that many people aren’t confident about their pension knowledge.
6 in 10 people couldn’t confidently say how much they have in their pension
7 out of 10 people can confidently say how much they hold in their cash savings, and 53% said they could estimate the value of their property quite accurately, according to an Aviva survey.
However, just 4 in 10 say the same about their pension despite pensions representing a larger portion of wealth and being crucial for your long-term financial security.
Saving into a pension under auto-enrolment is an important first step, but if you’re not reviewing your pension and what it means for your retirement it could put your long-term wellbeing at risk. Closing the knowledge and confidence gap is just as important as encouraging more people to save through a pension, and it could help you get more out of your savings.
What happens when you pay into a pension?
If you’ve been automatically enrolled into a pension, your contributions will be deducted from your pay cheque, so it’s easy not to think about what happens to the money. But engaging with your pension can help to ensure you’re taking the steps you need to secure your retirement.
As well as your own contributions, in most cases, your employer will contribute on your behalf. On top of this, you will receive tax relief on your contributions to boost your savings even further. This makes a pension a tax-efficient way to save for retirement.
The money within your pension will usually be invested. This could allow your pension savings to grow over the long term. If you haven’t selected how you’d like the money to be invested, it will usually be through a default fund. You will usually have a choice of multiple funds, covering a range of investment risk profiles, allowing you to choose one that’s right for you.
Here are some key questions you should answer to help you understand how your pension savings are building up:
- What contributions do you make to your pension?
- What contributions is your employer making?
- Are you claiming the full amount of tax relief you’re entitled to?
- How is your pension invested?
How do you know if you’re saving enough for retirement?
While you may understand how much is in your pension, understanding if it’s “enough” is much more difficult. To do this, you need to consider two things:
- How much money do you need to fund your retirement? This will depend on your retirement plans, such as the lifestyle you want. You will also need to consider how long your retirement will last and what other assets you may have to complement your pension.
- How will the steps you’re taking now add up over your working life? This means calculating how all the contributions will add up and what you realistically expect the investment returns to be.
Understanding if you’re on track for the retirement you want is important. If there is a gap, the sooner you know, the more options you’re likely to have. Spotting a gap early in your career may mean you can increase your contributions by relatively little as it’ll add up over several decades. If you don’t recognise a gap until you want to retire, you may have to delay or change your plans.
Having confidence in your pension means you benefit from peace of mind now and fully enjoy your retirement when you’re ready. If you’d like help understanding your pension, what it means for retirement, and how it fits into your overall financial plan, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.