A question we are often asked by clients who are first considering their retirement plans is, ‘will my workplace scheme provide enough for my retirement?’. This question is of course specific to each individual. What lifestyle you want at retirement, what assets and savings you have other than your workplace pension, and how much and how long you have been contributing to the scheme are just some of the aspects that will determine if your workplace pension fulfils your retirement goals.

first-time investors

What this question does highlight is the often-confusing nature of workplace pension schemes and the unknowns many people have around their retirement saving. Here, we consider the pros and cons of a workplace pension and outline what you need to consider when approaching your retirement planning.

What is auto enrolment?

In 2012, the UK government made a significant change to how workplace pensions operated by bringing in auto enrolment. Where before, the onus was on the employee to enrol on a workplace scheme (if one was available), this changed, so that today all employers must offer a workplace pension and automatically enrol eligible workers in it. Employees not wishing to participate are able to opt out, but they will lose the benefits of employer contributions.

How much is contributed to a workplace pension under auto enrolment?

Currently, auto enrolment is set to a minimum contribution of 8% of qualifying earnings, which for many will work out as a 5% contribution from their gross salary and 3% from their employer. However, both employers and employees can contribute more.

What are the positives of a workplace pension scheme?

There are a number of positives to contributing to a workplace pension:

  • Your employer must contribute a minimum of 3% of your pre-tax earnings to your pension between the qualifying earning ranges of £6,240 and £50,270.
  • All of your contributions are pre-tax, meaning anything you contribute reduces the tax and National Insurance you pay on that amount.
  • As well as this, you also receive tax relief from the government on your workplace pension contributions.

What are the negatives?

  • With the cost-of-living increasing, many may feel that they do not have the disposable income to contribute to a pension scheme. However, as a workplace scheme is a highly tax-efficient saving option, it is worth seeing if costs could be reduced elsewhere to continue contributing.
  • If you have already accumulated a significant amount of pension savings up to your lifetime allowance of £1,073,100, it could work out better to place your future savings into other tax-efficient investment vehicles.
  • There is often little control over what funds your workplace pension will be invested in and these funds may not support your retirement strategy. For example, some funds are constructed with the assumption that you will buy an annuity at retirement. But if your plans are to draw income directly from your pension pot, these funds may not be suitable.

Should I contribute more to my workplace scheme?

Whist auto enrolment has encouraged more people to save for retirement who may not have contributed to a pension otherwise, there are concerns that many people are still not saving enough.

According to research by Now: Pensions, around 12 million people in the UK are under-saving for retirement. Figures show that of these 12 million people, 10.4 million of these were earning over £25,000 per year.

This gap may be due to employees only contributing the auto enrolment minimum amount, which is likely to leave many people with only a small workplace pension come retirement.

How can I increase my income at retirement?

For those looking to increase their income at retirement, some of the best options are to:

  • Contribute more to your workplace pension scheme. Workplace pensions provide excellent tax relief, which over the course of a career provides a significant additional savings. The earlier you can contribute into a workplace scheme the longer that pot has to grow, so it is worth reviewing your retirement planning as soon as possible.
  • Look at additional ways to fund your retirement. Although pensions are a great way to save for retirement, they don’t have to be the only option. A Lifetime ISA can also be tax efficient option, or you could opt for a Self-Invested Person Pension (SIPP) alongside your workplace scheme.
  • Speak to a financial adviser. If you are concerned that you will not have enough money to retire comfortable, speaking to a financial adviser can be hugely beneficial. A financial adviser can help you to plan for your retirement based on your goals and your current financial position. If you would like to find out more, please get in touch.

PLEASE NOTE: Grosvenor Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority. The value of investment can go down as well as up and you may not get back the original amount you invested. Tax treatment is dependent on individual circumstances and may be subject to change. Tax planning is not regulated by the Financial Conduct Authority.

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