Jasmine Birtles
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Are you saving enough into a pension? Here’s how to max your retirement prospects
Karl
9th Jun 2023
Study the pension saving habits of the average Briton and you may feel a tad horrified about the retirement prospects facing millions of workers.
Back in April, the Institute for Fiscal Studies suggested almost 9 in 10 Brits are facing a ‘risky’ retirement simply because they aren’t putting enough into a private pension. Meanwhile, fresh data has revealed women are massively falling behind men when it comes to building a retirement fund.
In this article we’re going to touch on why general apathy may be one of the reasons why so many are failing to save properly for their retirement. Plus, we explore how to boost the size of your pension pot.
Keep reading for all the details or click on a link below to jump straight to a specific section…
What do we know about pension saving in the UK?
In April the Institute for Fiscal Studies revealed that the majority of workers (nearly 90%) in Britain, of all genders, simply aren’t saving enough for retirement with those in the lowest pay brackets most at risk of having poor pension provision.
Meanwhile, according to the first Government study of its kind, we now know that a typical 55-year old women in Great Britain has a private pension pot worth, on average, 35% less than a man of the same age. This means that for every £100 squirreled away in a man’s pension pot, a women in this age group typically has just £65.
Lower earnings, childcare duties, and a higher proportion of women taking on part-time work are just some of the factors being blamed for this painful disparity. Yet, whatever the exact reasons, it’s fact that many women are sadly going to be far less comfortable in retirement than their male counterparts.
Why aren’t workers in Britain saving enough for retirement?
Considering wages have lagged behind inflation for the past few years, plus the ongoing cost of living crisis, many workers do have a good excuse as to why they aren’t saving enough for retirement.
With this in mind, however, it’s fair to say that there are also a number of workers who aren’t saving enough for retirement, despite having the financial means to do so.
There’s no doubt one of the reasons this is likely to be the case is due to a simple lack of interest in saving for retirement.
And let’s face it, pensions can be a rather ‘dry’ subject. So you can argue the temptation to delay thinking about retirement is understandable. For many, pension planning is probably one of those tasks for ‘another day’.
While not a lot can be done about this general apathy, it’s worth bearing in mind that the way pensions are structured in the UK is rather confusing which certainly doesn’t help things.
What types of pensions are available in the UK?
In the UK we have private pensions and the state pension.
Within the private pension sub-category there are workplace pensions, standalone personal pensions, and self-invested personal pensions.
If you’re a tad confused about the differences between these types of pensions, here’s a quick overview…
Private pensions
Your private pension belongs to you. Any contributions come from your pre-tax income. So if you’re a basic-rate taxpayer, a £80 contribution essentially becomes £100. (For higher-rate taxpayers, the tax advantages are magnified).
Let’s take a look at the difference between the different types of private pensions:
- Workplace Pension: If aged over 22 but below the state pension age (currently 66), it’s likely you’re already enrolled in a workplace pension.
This is where a percentage of your pre-tax salary is paid into your private pension pot each month. A minimum of 8% must be contributed to your pot each month, with at least 3% coming from your employer. So, say your employer contributes 6%. This means you’d have to contribute at least 2%.
- Personal Standalone Pensions & Self-Invested Personal Pensions (SIPPs): For self-employed workers without access to a workplace pension, there are alternative ways of saving for retirement.
Standalone and self-invested personal pensions (SIPPs) allow you to direct your pre-tax income (100% of your earnings up to £60,000) into a private retirement pot. The main difference is that SIPPs give you more flexibility in terms of choosing where you invest your wealth.
Regardless of the type of pension you opt for, under normal circumstances, you won’t be able to access your money until you’re aged 55 (57 from 2028). When you hit this milestone, you’ll have the option of accessing 25% of your pot tax-free. You can drawdown the rest, or buy an annuity.
Importantly, all private pensions are ‘defined contribution’ schemes. This means they’re essentially a pot of money and once it’s gone, its gone (unless you buy an annuity). In contrast, ‘defined benefit’ pensions, which are now far less common (unless you’re a public sector worker), pay an ongoing sum for the rest of your life.
The state pension
The state pension is entirely separate from your private pension. You can receive both a private and state pension.
There state pension comes in two firms: the basic state pension, and the full state pension.
The new full state pension is currently worth £203.85 a week. To get it, you’ll need to have made at least 35 qualifying years of National Insurance payments.
If you have less than this, you may be eligible for the less generous basic state pension. The amount you receive will depend on the number of qualifying years of national insurance payments under your belt, and you’ll need at least 10 years in order to get anything.
A crucial part of the state pension is the age at which you can receive it. The current state pension age is 66 for both men and women, but this will rise to 67 by 2028, and is set to rise again before 2046. Of course nobody really knows whether the state pension will continue in its current form for much longer, especially when we consider the UK’s aging population!
This is one of the reasons why you should’t rely on the State Pension to support you through your later years. It’s best to think of it as a bonus to supplement your private pot.
What is the best way to save for retirement?
There’s no ‘one-size-fits-all’ approach to saving for retirement.
However, if you’re a PAYE worker and over 22, then opting for your employer’s workplace pension should probably be your first port of call. That way your employer will have to contribute at least 3% of your salary into a pension. Plus, some good employers will contribute more than the minimum.
These contributions are essentially ‘free money’ and you simply don’t get this with any other type of private pension. However, if you can’t get a workplace pension then opting for a standalone pension or SIPP will still give you the same tax advantages. Remember, pension payments come from your pre-tax income.
Non-pension options
While pensions are a popular choice, alternative options for retirement savings exist. Let’s take a look at some of them:
- Lifetime ISA: if you’re under 40 the Lifetime ISA offers a 25% bonus toward retirement savings (or a first home purchase). The maximum bonus is £32,000, though you can only pay in a maximum of £4,000 per year.
- Stocks & Shares ISAs: A Stocks & Shares ISA is essentially just a normal investing account with the added boon that returns are tax-free. You can currently put up to £20,000 into an ISA per tax year.
- Cash ISA (or normal savings account): If investments aren’t your thing, then it’s possible to save for retirement in a bog-standard savings account. Or, if you want the tax benefits, a Cash ISA. However, savings rates are currently a lot lower than inflation, so this is worth bearing in mind.
While all of the above enable you to save for retirement outside of a pension, the big downside is that your payments will be coming from your post-tax salary. Yet if you want the flexibility to access your wealth before 55 (or 57), then saving for retirement outside of a pension could be something to consider. (And don’t forget that there’s nothing stopping you saving for retirement both inside and outside of a pension).
How much do you need to save for retirement?
Regardless of the way you choose to save for your retirement, it’s best to start saving for your post-working years as early as you can. Even if you’re already well into your working life, remember that a small retirement pot is better than no retirement pot!
In terms of how much you need to save for retirement, as a rule of thumb it’s often suggested that you should aim to contribute a percentage of your salary that is equal to half your age when you started saving.
For example, if you started saving for a pension aged 22 years old while earning £26,000 per year, you should aim to put £2,860 (11%) of your annual salary into a pension.
While this sum may seem daunting to begin with, it’s worth knowing that the suggested 11% in this example would come from your pre-tax, not post-tax, salary. This means you wouldn’t see a 11% drop in your take home pay. Also, if saving into a workplace pension, you can include any employer contributions into the calculation.
The size of your pension pot
While it’s a good idea to contribute as much as you can towards your retirement, the size of your retirement pot will depend on the performance of the investments held in your pension. This is why it can be difficult to determine the exact level of income you can expect to receive once you’ve given up work.
However, while the value of your pension is likely to rise and fall over time, as long as you’re saving into a pension over many years, or even decades, there’s a strong chance your pension will grow over time thanks to the magic of compound interest.
To learn more about saving for retirement, take a look at article that explains all you need to know about pensions.
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MoneyMagpie is not a licensed financial advisor. Information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.
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