Is your workplace pension enough for retirement?

Auto-enrolment has encouraged many more people to benefit from their company’s pension scheme without extra effort from the employee. Unfortunately, the amount of money put aside may not be enough for your retirement goals. 

For those that are hoping to spend their retirement jet-setting, or dream of days on the golf course, a bit more money than is automatically put in your pot may make your plans possible.

What is a workplace pension?

A workplace pension is a type of pension set up by your employer. All employers must offer one and automatically add workers to it – if they’re eligible.

Currently, the minimum amounts for auto-enrolment in a workplace pension are a 3% salary contribution from your employer, as long as you are paying in 5% of your salary. Depending on how your workplace scheme is set up, this might mean that you contribute 5% tax free, or that you contribute 4% after tax, and then the government reimburses you for basic rate (20%) tax back into your pension pot.

Why might a workplace pension not be enough?

Auto-enrolment makes it compulsory for employers to automatically enrol their workers into a pension scheme, provided they are 22 or older and earnings before tax are at least £10,000 per year.

The scheme ensures employees don’t miss out on valuable pension benefits, although they can choose to opt out. However, this total contribution of 8% of salary is still below the level that affords many people comfort in retirement.

Disadvantages of workplace pensions in the UK

When saving for retirement through a workplace pension, it’s important to be aware of the limitations.

Limited investment range

Many workplace pensions have a limited range of funds to choose from. While this might work well for some investors, those who want different exposures, or more autonomy over their investment decisions, may not find the options they want.

Potentially high fees

Fees can also quickly eat away at investment returns, and some workplace pension plans can have quite high costs. Taking a look at your current portfolio and assessing these rates can make a big difference in how much you save.

The default fund that your pension is placed in through auto-enrolment can only have a maximum 0.75% investment fee or administration fee. However, if you pick a different fund than the default, it’s important to be aware of the charges. While some may have far lower fees than 0.75%, others might have a higher fee than this, harming your returns.

How much do I need in retirement?

What constitutes a good retirement income will depend on your individual circumstances. Important factors include if you have paid off your mortgage and where you plan to live.  

You can use your current spending to get a bearing on what these retirement costs will be, by factoring in any additional costs you have, and any that may be removed. For example, if you commute a long distance to work, you may be able to take down your spending when you no longer need to make those trips.

According to research for the Pensions and Lifetime Savings Association (PLSA), a single person aiming for a comfortable lifestyle should aim for a pre-tax income of £52,220 while a moderate lifestyle adds up to £36,483.

The state pension will also add a cushion to your retirement. Currently, the full rate is £230.25 per week, which comes to £11,973 per year. You currently start receiving state pension at age 66, but it is slated to move back to 67, and then 68 in coming years. For those that would like to retire at an earlier age, the cost will be dependent on your personal pension and other savings.

Learn more about how much you need to retire

How to get a grasp of your pension

1. Work out the size of your pension pot

If you’ve worked at multiple jobs, remember that you may have a few different pension pots. Combining your pensions pots can make it easier to get a good idea of how much you have really saved.  

2. Determine how your pot will split out over the years

This can be tricky. Some may choose to purchase an annuity, which means exchanging the money for a set income for either your life or a set number of years. Others may try to make an estimate of how many years of retirement they will have and make withdrawals accordingly. Remember, 25% of your pension will be tax free, and the rest will be subject to income tax.

However, it’s important to remember that at different points in your retirement, you might cycle through different amounts of spending. Often, people will do more travelling at the beginning of their retirement and stay closer to home in later years.

You could also choose to work a part-time job during your later years, which can provide supplementary income. In addition, you might decide to keep your retirement pot invested beyond age 65 and look to benefit from extra stock market growth.

How to increase your pension

Many may choose to simply increase their workplace contributions. Some employers will also increase their contributions to match your increases, so you could bolster your savings by even more. But if this is not available, you can also choose to save outside your workplace pension. This can allow for more flexible investment strategies or ways to access your pot.

Find out more about personal pensions

How can I use different tax wrappers to save for retirement?

There are lots of other saving methods you could consider using alongside your work-place pension through using different tax wrappers.