Or it’s off to detention
Most pension geeks / experts relentlessly highlight the fact that current minimum pensions are simply not enough.
Happily, then, the Living Wage Foundation recently announced a new pension standard to urge employers to raise their game and do more to support UK workers’ retirements.
The Living Pension is a voluntary scheme, like the living wage. It challenges employers to contribute at least 7% (for a total of 12%) of an employees’ annual salary towards their pension each year. The suggested amount is a big hike on the status quo which obliges employers to contribute just 3% (for a total of 8%) of an employees’ annual salary.
Economists already fear a major pension gap in years to come and the situation’s worsening. Many workers are cutting back on contributions to buy breathing room through the cost-of-living squeeze.
In February, Savanta surveyed 3,000 working-age UK adults and found that nearly two-thirds (64%) of us believe we’ll have to work several years beyond retirement age. While more than half (56%) of us fear we’ll never be able to retire at all …
I’ll do it later …
If you’re under 30, or 40, or even 50, retirement might seem like light years away. But the best time to take control of your pension is yesterday.
For one, the sooner you sort your own pension, the more time you’ll have to reap the natural rewards on offer. Keep reading. There’s plenty of free money up for grabs.
Also, many people don’t know that pension funds are invested. It’s how they grow. So if you have a pension, specifically one arranged via your employer, wouldn’t you like to know what you’re investing in? What future you’re endorsing?
At some point in history, whether last month, last year or last millennium, your employer chose a pension fund. But why this particular one? Perhaps it was most advantageous for them. Perhaps it was a compromise. Perhaps Jo in accounts made the selection … in 1989. That HR guy with the skewed outlook on life … maybe he took charge.
The point is that your pension may be working hard … but not for you. The nest you’re feathering could be tainted, substandard, or just a bad pick versus your values.
Lastly, the UK state pension will soon rise to just over £200 per week. It’s not a lot if you wish for a long and fulfilling retirement. And because you’ll probably have to sort your pension eventually, there’s no better time than now …
Boosts, benefits & wonders of the world …
As we just touched on, there are values-led reasons to engage with your pension now. But there are shrewd and practical reasons too.
We mentioned free money … here’s how to get yours:
1. Employer contributions
In most cases an employer is obliged to contribute something towards every employee’s pension. Sure, that something might be the bare minimum, but it’s also possible they’ll match or even multiply any pension contributions you make. So check your workplace pension policy so you can take advantage of what, basically, is free money.
2. Tax benefits
A major benefit of saving into a pension is the tax relief. The relief you’re entitled to depends on your tax bracket but, in a nutshell, basic rate taxpayers get 20% relief (usually claimed at source), while higher rate taxpayers and additional rate taxpayers can claim 40% and 45% relief respectively through self-assessment.
Unfortunately not all higher tax payers know to claim what’s theirs. A staggering £810m worth of higher rate pension tax relief goes unclaimed every year. Right now, 80% of higher rate tax payers are shorting themselves.
3. Compound interest
You’ve heard us quote old Albert Einstein before and here we go again: ‘Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.’
Time is compound interest’s best friend. The more time you allow then the more interest on your interest you’ll earn.
Investing for good
When it comes to pensions we believe in a few golden rules. Assuming you don’t feel in full control of your pension, here’s a rundown of what to do now:
1. Find it
If you’re employed and aren’t sure if you have a pension (you should have) then check a payslip or ask a higher up. At a minimum it’s worth knowing your employer’s pension policy (so you can take advantage of any benefits), and what your current pension balance is.
2. Scrutinise it
To repeat, most people we speak to don’t know that their workplace pension is an investment; one likely chosen by the employer. Make it your mission to find out more about this pension fund as it may not align with your needs or values. You should be able to change your pension and still retain any employer benefits.
3. Save into it
Aim to save at least 10% of your income towards your pension each year. Really, that’s a minimum – ideally it’ll be more.
4. Review it
It pays to review your pension regularly. Keep track and make sure it’s performing well. We advise that you review your pension and its suitability any time your circumstances change, particularly if you land a new job.
By the by, we love how Guiide are helping customers understand their pension needs.
5. Get advice on it
Professional advice is a great place to start in pension planning. To speak with a financial advisor here at Money Means simply join our waitlist and we’ll help you understand pensions better.
Einstein image taken from page 53 of The Money Means book, available now.