How much are YOU saving for retirement?
New figures show more people are saving than ever before but the monetary amount may still be inadequate
Last week we were treated to a slew of statistics from both the Office for National Statistics (ONS) and HM Revenue & Customs (HMRC). The figures paint a fascinating picture of the way retirement is changing in the UK, as well as the challenges faced by both individuals and governments.
Here are my three big takeaways from the official numbers:
MORE PEOPLE ARE SAVING THAN EVER BEFORE
UK savings rates were in the pits in the aftermath of the 2007/08 financial crash. In 2011/12 5.3m people were saving through personal pensions, the lowest figure on record.
Fast forward to the data for 2015/16 published last week and pension scheme membership has jumped by a massive 70% to 9m. That’s 3.7m extra people saving for retirement.
The main driver is automatic enrolment, a reform programme launched in 2012 that will eventually mean all employers have to put workers aged 22 or over into a pension scheme. People are free to opt out of their workplace scheme but so far most (around nine in 10) haven’t done so.
While some workers, including low-earners and the self-employed, are currently excluded from auto-enrolment, there is no doubting the impact the changes have had in reversing the post-crash decline in pension scheme membership.
PEOPLE AREN’T SAVING ENOUGH
According to the ONS, average contributions (members plus employees) into occupational pension schemes stand at just 4.2% of pensionable salary.
It’s particularly worrying that member contributions dropped from 1.5% in 2015 to 1% in 2016. Even with 40 years of savings on an average UK salary that is going to get you a pension pot of around £125,000. That’s a healthy amount but nowhere near enough to provide a decent income for 30 years of retirement.
This will edge upwards as minimum auto-enrolment contributions are due to rise to 8% by 2019 (4% from the employee, 3% from the employer and 1% in tax relief), but even this won’t be enough to provide a good retirement income for most people.
THE COST OF PENSION TAX RELIEF IS GOING UP
Tax relief in the UK is granted based on your tax band or ‘marginal rate’. So a basic-rate taxpayer gets 20% tax relief, higher-rate 40% and additionalrate 45%.
Withdrawals are taxed at your marginal rate, but people tend to pay less tax on the way out than the way in because their income needs in retirement are lower.
With more people saving in pensions, the net result is a rise in the amount the Government spends on tax relief to almost £25bn in 2016/17.
Speculation has already started suggesting pension tax relief could be cut back in the Budget later this year. Thus if you were already planning to pay into your pension in the current tax year, it may be worth doing so before the Budget.