Want to retire eight years early? Make your pension work harder
MiLLions more of us are now pension savers thanks to autoenrolment. But how much do you know about where your life savings are being invested, and could they be working harder for your retirement?
Here, BEN WILKINSON explains how by getting to grips with your workplace pension, you can bolster your pot by thousands — and even retire years earlier.
SAVING FOR THE FUTURE WITHOUT THINKING
BEFoRE workers were routinely signed up to workplace pensions in 2013, there were just one million employers in such schemes; now there are more than ten million.
auto-enrolment sees workers aged over 22 pay into a defined contribution pension on earnings above £10,000. Your retirement fund depends on how much you squirrel away.
These are different to defined benefit schemes, offered by some public sector employers, which pay out a pension income based on your years of service and final salary.
if you have been auto-enrolled, you will pay 4 pc of your wages into your pension, while your employer must put in at least 3 pc.
The government effectively adds another 1 pc in tax relief.
Experts have praised auto- enrolment for getting the nation saving for retirement, but warn it could be misleading workers into thinking they are doing enough.
YOU CAN ‘DOUBLE YOUR MONEY’
BY asking a few questions about how much your employer is willing to contribute, you could boost your retirement income by thousands of pounds. steven Cameron, pension director at aegon, says autoenrolment has ‘lulled people into a false sense of security’.
Figures from the pensions provider show that a 30-year- old earning £27,000 and due to retire at 68, would have a pension pot of £255,333 if they stuck to auto- enrolment contributions. Yet if the worker upped that by 2.5 pc and the employer matched this rise, they would retire on a pot worth £414,916 — nearly £160,000 more.
alternatively, if the same worker was aiming for a pension pot of £250,000, they would hit their goal eight years earlier by increasing their contributions.
Mr Cameron says increasing contributions was ‘highly likely to be the most effective way of saving’, adding: ‘You can easily double your money.’
Research from mutual insurer Royal London has revealed that around three millions workers are missing out on an estimated £2 billion of employer contributions every year.
steve Webb, director of policy at Royal London, says there is a ‘ fantastic rate of return’ in saving enough to qualify for your employer’s maximum contributions.
He adds: ‘nothing else you can do comes close to this in terms of value for money. it’s like turning down a pay rise if you don’t do so.’
WHERE IS YOUR CASH INVESTED?
YouR employer decides where your pension is invested, but it is you who bears the risk.
More than 90 pc of workers will be invested in their company’s default fund. Yet the performance of this will dictate when you can afford to retire and how much you’ll have to spend.
Default investment funds are designed to balance risk and return. But if you are willing to make riskier investments, you could boost your pension.
Your employer or pension provider should be able to give you tools to find out what funds are available and appropriate.
Mr Cameron says: ‘if you did manage to add an extra 1 pc return, then over 30 years that could make a big difference.’
sums from aegon show that the average auto- enrolment pension would be worth close to £75,000 more on retirement if it performed 1 pc better.
However, if you are thinking of picking a more adventurous investment, then you should speak to a financial adviser.
as many pension pots are put in default tracker funds, your money could end up in tobacco, oil, gambling, or arms firms. This is because tracker funds — those not managed by a human — automatically transfer your money to the best performing funds.
almost all workplace schemes offer an ethical fund that screens out cigarette firms. But it could be pricey to opt out of the ones you consider to be unethical.
aegon estimates you will pay an extra 0.3 pc in charges to avoid investing in companies you don’t like — reducing a £255,000 pot by £14,808 over your career.
HOW HIGH ARE THE FEES?
PEnsion platforms will soon be required to display fees in pounds and pence rather than as a percentage. While investment firms can charge as much as 3 pc, default pension fund fees are capped at 0.75 pc.
But the difference between an annual charge of 0.2 pc and 0.75 pc could be £114,115 after a 50-year career, according to analyst firm Defaqto’s recent report on workplace default funds. The report called the cap ‘actually quite expensive’ adding ‘most medium and large employers could be paying significantly less’ by shopping around.
But remember, if you move your money out of your workplace default fund, you won’t be protected by the charge cap; if you pull your money out of your workplace scheme altogether, you’ll lose employer contributions.
Julian Mund, chief executive of the Pensions and Lifetime savings association, concludes: ‘automatic enrolment means the vast majority of people will default into funds that will give them good outcomes by the time they retire. Two principles are it is always a good idea to tip more into your pension if you can afford to, and it is never too late to start saving.’