Pension contributions increase but will your retirement income fall short?

How are you saving toward retirement?

If, like most people, you are relying on your State Pension and Workplace Pension, you might need to rethink your plan.

For many of us, the combination of workplace and State Pensions simply will not provide enough income to support our retirement lifestyle.

Let’s look at what you are likely to get if you rely on those two alone.

Workplace pensions

More than nine million more people have enrolled in a workplace pension since the introduction of automatic enrolment (Source: DWP), this has greatly improved the retirement outlook for many people. However, for employers and employees who stick to the minimum contributions, the pay-off is unlikely to provide a liveable income when they leave employment.

A workplace pension requires monthly contributions from both you as an employee, and your employer. Currently, the legal minimum for both parties is 1% of your pensionable earnings. However, that is due to rise in April to 2% for employers and 3% for employees. These minimum contributions will increase once again in April 2019, to 5% employee and 3% employer.

These contributions are not made using a percentage of your full salary. Rather, they are calculated on your ‘pensionable earnings’. This is the amount earned between £5,876 and £45,000. This means that you are contributing less than you would be if your full earnings were considered.

How much will you have?

So, your monthly pension contributions will increase, but how much will you actually have when you retire?

Let’s look at an example.

A 30-year-old in 2018 who earns an average salary of £26,624 (Source: ONS), with a projected retirement age of 68, will have accumulated £151,000 in their pension pot.

With a projected retirement age of 68, they will have accumulated £151,000 in this pension pot.

That sounds like a lot, until you try to turn it into an income.

If they choose to take a 25% Pension Commencement Lump Sum of £37,700, they will be left with an annual income of £5,240. Without it, they could take an annual income of £6,990, or £582.50 each month.

The NEST pension Calculator lets you see how much you could have in your pension pot when you retire.

Your State Pension

The same person, with the full 35 qualifying years, could see an annual pension of £8,320, or £160 per week. (Source: Gov.uk).

Unfortunately, research shows that younger people are uneducated about the State Pension, and are therefore unable to plan appropriately. According to B&CE, the majority of 18-24-year olds are unaware of:

  • The amount of State pension they could receive (93%)
  • The age they will be able to access their State Pension (83%)

The story is slightly more optimistic among older adults, as:

  • 52% are not sure when they can access their State Pension
  • 55% don’t know how much they could receive

If you are among them, you can find out your State Pension Age here.

And, while the income you will receive is likely to change over the next 30 to 40 years, there are estimates available here.

Adding it together

Our 30-year-old could receive an annual retirement income of £15,310, or £1,275.84 each month. That is as long as they:

  • Never take time off work for illness or injury
  • Do not require a Pension Commencement Lump Sum
  • Can remain employed at the same salary

At just over half of their current annual income, it is likely that they will struggle to adjust to the lifestyle change that such a sudden drop in income will bring.

It is also likely that it will not be enough for them to survive on.

To see how much you will need in retirement, you can use a retirement income calculator.

Bridging the gap

To increase your retirement income, you could try a range of solutions, including:

  • Ask your employer to increase your salary or their contributions to your pension fund
  • Forgo some luxuries and put every spare penny aside for later
  • Continue working part-time or as a consultant rather than retiring completely

Alternatively, you can talk to an independent financial adviser, who will help you to identify your goals and aspirations for retirement, then put a strategy in place to work toward them.

Consulting a financial adviser can help you to boost your retirement income. Of those who had sought advice and planning:

  • 65-79-year olds earned an additional £1,100 per year
  • At 80+, retirees had an extra £1,300 per year

(Source: International Longevity Centre)

If you want to discuss your retirement income and find solutions to help you to improve the type of lifestyle you can look forward to, feel free to get in touch with us on 0207 808 4120.