Why you shouldn’t assume your auto-enrolment pension will give you enough

In the first seven years of auto-enrolment, ten million workers benefited from joining a workplace pension. Despite this, figures show that many people still aren’t contributing enough to provide them with a comfortable retirement.

Read on to find out why you shouldn’t assume that your auto-enrolment pension will give you enough, and what you can do to make sure you generate the income you want in retirement.

What is auto-enrolment?

It has long been recognised that many people don’t save enough for their retirement. While the State Pension is useful, the current State Pension only provides £9,110 per year which is unlikely to be enough for you to retire comfortably.

Auto-enrolment is an attempt to encourage workers to start building up retirement savings by automatically enrolling them into a workplace pension.

The scheme was designed so that workers who want to save can do so without having to set up the pension themselves. Instead, their company automatically deducts some money from their wages and contributes it into a pension fund, as well as adding in some themselves.

The minimum amount that your company must provide is 3% of your gross salary, although they can provide more if they choose. The total minimum contribution is 8% so if your employer provides their minimum 3%, then you would have to provide an additional 5%.

For example, if you earned a salary of £24,000 per year, your qualifying earnings would be £17,760. This is worked out as your salary before tax (up to a limit of £50,000) minus the lower earnings threshold of £6,240.

You would have to pay 5% of that £17,760 into your pension pot. This works out as £888, or £74 per month. Your company would then pay another 3% on top of this, an additional £532.80, bringing your total minimum pension contribution up to £1,420.80 per year.

Note that some employers may pay your pension contributions based on your full salary, not just on your qualifying earnings.

Why that might not be enough

Whilst auto-enrolment has been a success in that an additional ten million people are now saving for a pension, there are concerns that many are not saving enough.

According to research by Now: Pensions, around 12 million people in the UK are under-saving for retirement. Figures show that of these 12 million people, 10.4 million of these were earning over £25,000 per year.

One issue with auto-enrolment pensions is that many people only invest into it at the minimum level. While investing at the minimum level will provide you with a small pension, it is likely that it won’t provide enough money for a comfortable retirement.

Research by Which? has shown that a comfortably retired household spends around £2,110 per month, or around £25,000 per year.

Using Aviva’s retirement calculator, if you are a 26-year-old earning the average salary in the UK (£30,420 per year according to the ONS) and you paid 8% of your salary into your pension, at a retirement age of 66 your savings would generate an income of around £7,000 per year based on your estimated life expectancy.

Even if you added the State Pension on top of this, it would only bring it up to around £16,000 a year; a long way below the level of £25,000 per year that you would need to live comfortably. This is why it’s important not to rely on just your auto-enrolment pension to provide you with enough when you retire.

What you can do to supplement it

If you’re worried that your pension won’t be enough to provide you with a comfortable retirement, here are three things you can do.

  1. Increase your pension contribution

For younger people, pensions can seem like an expense that you can’t afford, especially when you’re paying rent or mortgage payments. However, paying into your pension pot is a great long-term investment, particularly when you factor in things like tax relief and compound interest returns.

The earlier you can make additional contributions, the longer they have to grow. It can really pay to increase the amount you pay into your pension during the early years.

  1. Look at alternative ways to fund retirement

Although pensions are a great way to save for retirement, they don’t have to be the only thing that funds it. You can supplement your retirement fund with other savings and investments if you’re worried your pension won’t provide enough.

For example, you could also consider opening a Lifetime ISA (Individual Savings Account). This type of tax-efficient investment is designed to support retirement, with the government providing a 25% bonus on your contributions. You can draw the savings from your Lifetime ISA after the age of 60 and you won’t pay tax on any interest, income or capital gains on money held within a Lifetime ISA.

  1. Speak to a financial adviser

If you’re concerned that you won’t have enough money to retire comfortably, speaking to a financial adviser can be hugely beneficial. A financial adviser can help you to organise your finances and help you to use your money effectively to help to provide for a comfortable retirement.

Get in touch

If you’re concerned about your retirement and want to know more about growing your pension, we can help. Email enquire@london-money.co.uk or call us at (0207) 808 4120 to find out more.

Please note:

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

Workplace pensions are regulated by The Pension Regulator.