If you are concerned about meagre retirement savings, Jonathan Watts-Lay explains how your employer may offer several options that could help you save more money.
22% of UK adults expect that they will never be able to afford to retire, equating to almost 8 million people, according to latest research. A report from the Department for Work and Pensions also found that there may be 12 million individuals who are not saving enough for their retirement. But what can individuals do to save more, even when they think they can’t afford it?
Auto-enrolment has been great for getting more people to save into a pension. Currently, employers must pay in a minimum of 3% of their employees’ qualifying salary into a workplace pension, and employees pay in a minimum of 5%, totalling 8% overall.
However, some individuals may believe that the current contribution rate of 8% is the “right” amount and not consider paying more, not realising that this might not afford them the standard of living they are hoping for in retirement.
Research has found that a person on the UK average salary needs a pension pot of more than £300,000 to be able to maintain their current lifestyle once they retire. But what if your savings are not on track for this? It is important that people don’t panic and bury their head in the sand, as there is a lot that can be done to bridge the gap, if there is one.
For example, individuals may want to check if they are missing out on “free money” from their employer in the form of “matching contributions”. There are many pension schemes where employers offer very generous pension contributions above the compulsory 3%, and individuals could take advantage of more “free money” from their employer by making additional contributions that their employer is prepared to match.
Some employers also offer other tax-efficient options to help their employees save or invest their money, which could be used for retirement while at the same time offering the flexibility of accessing savings earlier, if needed. These include Save As You Earn (SAYE) schemes, Share Incentive Plans (SIPs) and workplace Isas. These options might not be a pension, but still offer a useful way of saving for the future.
SAYE schemes are a monthly saving scheme that offer an option to buy shares in your company at the end of the scheme, normally three or five years. They are normally a win/win investment, as savers are not exposed to any investment risk unless they choose to buy shares at the end of the saving period, and at this point they have the option to immediately sell and realise their return. If the business does well, they can be a very good investment.
SIPs can be a tax-efficient way to buy shares in the company you work for, because you don’t pay tax or National Insurance on the money you use to buy the shares. You are, however, normally required to hold these shares in the plan for at least five years to retain this tax and National Insurance saving, exposing your money to a degree of investment risk.
Workplace Isas offer another tax-free savings option on top of your workplace pensions. You can contribute directly from your net salary, and the fees are usually discounted when you get the Isa through your employer.
However, many people believe that they can’t afford to save more, whether that be into their pension or another savings vehicle; they may not realise the huge difference that small changes to their spending habits could make to their savings levels overall.
Individuals can benefit from finding out where their money is going by checking bank statements to see what is being spent each month, and see where savings could be made. Simple things like making sure that they have a good deal on their utility and insurance providers, particularly car insurance, can save hundreds of pounds a year.
As well as this, cutting back on impulse purchases, registering for cashback cards and sites, and not having to have the latest mobile phone are all savings that can really add up.
Pensions and saving may not be the most engaging or exciting of topics for many, but help is available. We have educated hundreds of thousands of employees about what they will be able to afford in their retirement, the benefits of paying into a pension as well as other savings, and the value of contributing as much and as early as possible.
I urge all readers to speak to their workplace to find out what support they provide.
Jonathan Watts-Lay is director of WEALTH at work, a specialist provider of financial education and guidance in the workplace supported by regulated financial advice for individuals.