This week marks the end of one tax year, and the beginning of the new 2017/18 tax year. For investment ideas, back to basics education and advice from the experts read Morningstar’s Guide to Planning for Retirement.
Want to boost your earnings in one simple step? Millions of workers are paying just the minimum contribution into a workplace pension scheme – meaning their employers are too. Maximise your pension contributions and your employer will up their ante too.
Auto-enrolment was introduced five years ago, initially rolled out across the largest businesses in the UK, filtering down by size so that now – in its final stages – the smallest businesses are setting up pension schemes for their employees. Auto-enrolment opts workers into a workplace pension scheme by default, replacing the previous system where workers had to personally request to partake in a retirement savings scheme.
Newly opted in workers are signed up to contribute the bare minimum of 0.8% of their salary, while employers must contribute an amount equal to 1% of their employee's salary every time the employee is paid. The Government then tops this up with a further 0.2% of salary – meaning you’re getting free cash from the state as well as your employer.
After April next year, the employee contribution rises to 2.4% of salary, the employer contribution rises to 2% and the Government must put in 0.6% – bringing the total contribution to 5% of annual salary. This rises again in April 2019 to 4% contribution for the employee, 3% contribution from the employer and 1% from the Government, bringing the total contribution to 8% of salary.
You Have to Be In It, to Win It
Unlike the workplace pension system in Australia, scheme membership is not compulsory in the UK. If you do not wish to contribute to your workplace pension, you can opt out. But you would be foolish do to so, especially if you are under the age of 40. Some doubt has been cast over the future of the State Pension for those in Generation X – currently aged 30 to 40, and the Millennials – aged under 30.
There is a shift taking place in the UK, following the US model, whereby responsibility for retirement provision is moving from the state to the individual. Simply put, if you don’t save now, you may be left with nothing at all in retirement.
While there are other tax-efficient structures that allow individuals to save for the future – such as ISAs and SIPPs – these are not as generous as the workplace pension. Contributions to the Lifetime ISA and Self Invested Personal Pension (SIPP) are topped up by the Government, but only the workplace pension combines cash from the individual, the employer and the State – more than doubling your purchasing power.
Maximise Your Contributions
You do not have to wait for the April next year to raise your contributions. Many employers promise to match employee contributions up to a threshold – usually around 4 or 5%, although some businesses contribute as much as 10% to an employee’s scheme.
Studies have shown that if you start saving for retirement at age 22, you’ll increase your retirement income by around 20% compared to waiting just three years until you are 25. The earlier you maximise your contributions, the better.
