This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Julian Webb, Head of Fidelity’s DC and Workplace Savings Business outlines the benefits of auto-enrolment.
Whether you work for a large company and have already been auto-enrolled into a workplace pension, or it’s something that you are aware of that will be happening in the future, the first anniversary of auto-enrolment is a great time for reflection on saving for retirement.
Auto-enrolment is good news for those who haven’t thought yet about their pension, and with only 9% of employees choosing to take themselves out of their company’s scheme so far, it has made a positive impact.
Auto-enrolment has given everyone in the UK the opportunity to really take charge of their retirement and give themselves the best chance to live their life the way they want to.
Opting out of the pension scheme you’ve been automatically enrolled into might seem like the easy option now, but the income you’ll need in retirement should not be underestimated. The State Pension will only cover half of the basic cost of living – which doesn’t include things like eating out, owning a car or taking holidays.
We urge people to really do their research and give some thought to the longer term implications of their choices now on their retirement. Opting out of your pension scheme for good could lose you significant amounts of money. For a worker currently earning £26,000 per year, they could lose nearly £54,000 of pension savings – including more than £13,000 of employer contributions and more than £4,300 of government tax relief.
Food and fuel: the basics of living in retirement are unavoidable
It may sound simple, but we must not overlook the fact that spending in retirement is guaranteed. There will be expenses that you cannot avoid and things you need to do that cost money. You might also need to make some home improvements, or buy a car to get you from A to B. On average, pensioners spend around £190 per week, which is equivalent to nearly £10,000 each year. It would take a pension pot of £165,000 to get you an annuity paying even this amount each year. The full basic State Pension only amounts to £5,727.80 per year – leaving a big gap in even a frugal budget.
Creature comforts: lifestyles come at a price
Our friends, hobbies and interests don’t just disappear once we retire, so picture the lifestyle you want and plan it in advance. Dining out with friends roughly every 2 weeks could cost £2,220 over a year, staying healthy through a gym membership might set you back a further £600, and a family holiday with grandchildren could cost £2000. Staying in your workplace pension will generate savings which you can put towards those little luxuries.
Making work pay: get more from your money with employer contributions
While there are many options to save for your retirement including ISAs and different types of pensions, you should not under estimate the value of saving into the workplace pension scheme offered through your employer. Not only will your employer contribute on your behalf, some employers match any additional contribution you may make. Ask your employer for more details if you are not already enrolled or haven’t heard anything about it yet.
Topping up: you can always save outside your pension plan
Remember, being enrolled into a workplace scheme doesn’t mean saying goodbye to other ways of saving. There are a number of ways to maximise your retirement savings which can complement your workplace pension scheme:
- Find out how much you have saved right now. If you have a number of pension pots, consolidate them. For any lost pensions, visit gov.UK/find-lost-pension or 0845 6002 537;
- Monitor and keep on top of your investments. If you are in a workplace pension scheme or a SIPP, make sure the funds you are invested in are the right ones for you;
- Make the most out of the tax efficiency offered by ISAs. Wherever they are offered, either in or outside the workplace;
- Top up your State Pension – if you have a gap in your National Insurance, you may be able to make it up.
The annuity question: call in the experts
Annuity rates may be rising, but they’re only part of the story. Rates of income can be influenced by factors like your health conditions or marital status, so it’s important to look behind the headlines and find the best rate for you. Your workplace pension provider may be able to point you in the direction of the experts: for example, Fidelity refers members to Annuity Direct.
You don’t have to annuitise immediately when you retire. Income drawdown options may suit you better – but it’s always best to seek guidance first.
