Why it’s Never too Soon to be Thinking About Retirement – It’s Pension Awareness Day!

10th September 2019
Kathryn Kirton

Retirement can seem like another planet when you’re young, but don’t make the mistake of thinking that pensions are something only old people need to think about. It’s Pension Awareness Day and so it seems the ideal time to look at the importance of starting to save towards your retirement as early as possible.

Throughout the UK, it’s clear that on average, people aren’t saving enough money to pay for a comfortable retirement. A recent study by the Office for National Statistics shows that the number of people aged over 70 who are still in work has more than doubled in the last decade. Many people enjoy their job and are keen to remain in the workplace as they get older, benefiting from keeping busy, spending time with colleagues and continuing to use their skills and experience. However, there is also an increasing number of people who are still working well into their 70s because they’re not financially able to retire and for them, continuing to work is a necessity rather than a choice.

So, to try and ensure that you will be able to retire when you want and enjoy the standard of living you expect, it’s crucial that you’re aware of the best way to prepare financially and don’t delay putting some simple measures in place.

State Pension

The pension you will receive from the Government is called the State Pension and it’s currently a maximum of £168.60 per week or just over £8,700 a year. The age at which you start receiving your State Pension depends on when you were born. You can use this calculator to find out your State Pension Age. How much you will be entitled to depends on your National Insurance record. You need to have 35 years’ worth of qualifying NI contributions when you reach State Pension age to qualify for the full amount. If you’ve had a career break for any reason, have lived abroad or have had periods of self-employment, it’s worth checking your NI record and consider filling any gaps by buying additional years.

However, even if you qualify for the full amount, the State Pension alone is unlikely to allow you to afford the kind of retirement you’re imagining. You need to plan to supplement your State Pension, perhaps through savings accounts and investments, but an additional pension plan is a tax efficient, low-cost and relatively low-risk way to save for the future and the obvious place to start. You can look at personal/private or stakeholder pension plans and if you’re employed, then your employer probably offers an Automatic Enrolment pension plan.

Automatic Enrolment

Automatic Enrolment (usually referred to as Auto-Enrolment) is an initiative introduced by the Government to ensure more people have savings in place ready for their retirement. If you’re between 22 years old and State Pension Age and earn more than £10,000 from one job in the UK, you will be enrolled automatically in your employer’s pension scheme. If you earn between £6,136 and £10,000, you won’t be automatically enrolled, but you can choose to opt into your employer’s scheme. You, your employer and the Government will all pay a percentage (the minimum is typically a total of 8%) of your salary – via deductions from your salary – into the pension plan, which you’ll be able to access from the age of 55.

Temp Workers

If you’re working as a temp through an agency, you also will be subject to the same Auto-Enrolment conditions, although Auto-Enrolment can be postponed for 3 months. After 3 months, temp workers will be auto-enrolled in the same way as permanent staff. Here at MacKenzie King, our consultants will always make sure that temps working through our agency will be enrolled automatically on our pension scheme at the relevant time. They’ll ensure you receive all the benefits you’re entitled to, provide all the information you need and be able to answer any questions you might have.

Opting Out

If you don’t want to participate in your employer’s Auto-Enrolment pension scheme, you’ll need to opt out. For most people, taking part in their workplace pension scheme makes long-term financial sense. You’re planning for the future, getting tax benefits and your employer is contributing – effectively it’s a pay rise, just one that you’re deferring for retirement. However, if you have expensive debts, already have a pension plan or are near retirement age, then opting out might make sense. But for most people, participating in the scheme will be a sensible choice and if you can afford it, you might even want to pay more than the minimum amount into your pension plan.

How Much Should You Contribute

When retirement seems a long way off, it can be hard to know how much you should be paying into your pension and it can be difficult, if not impossible, to choose to pay in more than the minimum when you have countless other outgoings and debts to manage. But as and when you can pay in more, over time it can really boost your savings.

As a rough guideline, Moneysavingexpert.com suggests taking the age you started your pension scheme, halving it and putting this percentage of your gross salary aside each year until you retire. For example, someone starting to pay into a pension at age 22 should contribute 11% of their salary each year for the rest of their working life; someone starting their pension at age 32 should contribute 16% per year. Alternatively, another general recommendation is to save at least 13% of your income each year, in order to maintain a similar standard of living post-retirement.

This can seem like a big chunk of your income, but the earlier you start and the more you can contribute, the better. A recent article in The Independent stated that someone now in their mid-40s should have already saved a colossal £187,000 in order to be able to retire on an income of £19,000 per year.

Better Late Than Never

Finally, although when it comes to saving for retirement starting as early as possible is ideal, providing you’re under 75 years old, it’s also usually not too late to start paying into a pension scheme. So, if you are in your 40s or 50s, then there is plenty of advice available to help you maximise your nest egg and improve your retirement prospects.