What does £98,000 mean to you? For some, that’s the deposit on a new house, for others it’s financial security and the knowledge that they will not have to worry about their income in retirement. For young people thinking about opting out of a Workplace Pension as a result of the minimum contribution increases, it’s the amount they sacrifice for the sake of having an extra £30 in their monthly pay. Minimum contribution rises During the rollout phase of automatic enrolment, the minimum contributions for both employers and employees have been 1% of the employee’s qualifying earnings. ‘Qualifying earnings’ is the value of annual earnings between £5,876 and £45,000. From April 2018, those minimum contributions rise to 3% from the employee and 2% from the employer, with further rises to 5% employee and 3% employer contributions, due in April 2019. For some, giving up an additional 2% of your earnings might sound like a lot, but the long-term benefits of remaining in your Workplace Pension will far outweigh the small amounts you sacrifice in the short-term. To put it another way, if your boss told you, you were getting a 2% pay cut, would you walk out? The effects of opting out By opting out after being automatically enrolled, you effectively turn away free money which will support your lifestyle when you retire. Money you put into your fund is topped up with both contributions from your employer and 20% government tax relief. The average annual income in 2017, according to the Office for National Statistics (ONS), was £28,600. From these earnings, your monthly contribution is £45, your employer puts in £30 and tax relief tops it up by a further £14, for a total of £94 each month. For a 22-year-old, that could mean an eventual retirement fund of £98,300 after 40 years, assuming an average annual rate of return of 2.4%. Of course, this is not guaranteed; it could be higher or lower. Furthermore, when your contributions rise again next year, your final pension pot will be higher. (Calculated using Aviva Retirement Planner) By opting out, you lose all of this. What happens if you have no Personal or Workplace Pensions? To qualify for any State Pension, you must have at least 10 qualifying years on your National Insurance record. For the Full State Pension, 35 years are needed. These are years in which you have paid your National Insurance in full or received credits alongside state benefits. You can check your National Insurance Record and make voluntary contributions to reach this point by clicking here. The Full State Pension is currently £155.60 per week, or £8,091 each year. You can see what you will get by clicking here. Without any additional pension savings, your lifestyle on that amount is likely to be very reserved. With no additional income you face the risk of: Being unable to make mortgage payments and potentially losing your home Getting into debt Being unable to leave a legacy for your loved ones Having to borrow money from friends and family to survive Being unable to afford the right healthcare or accommodation in later life What will auto enrolment provide? The minimum pension contributions on a £28,600 annual income could leave you with a retirement fund of £98,300 which could be used to buy a guaranteed income of £520 per month (Source: Aviva Pension Annuity calculator), or £6,240.35 annually. Add that to a full state pension, and you start to see a more manageable income. However, experts recommend that you should be saving between 12% and 15% of your salary, to create a retirement income which will allow your current lifestyle to continue. For a 22-year-old earning the same average income, 15% contributions would amount to a retirement fund of £447,000 (assuming an average annual rate of return of 2.4%) by the age of 62. This could be used to buy a guaranteed, pre-tax income of around £27,789 per year, or £2,315 per month. (Source: Aviva Pension Annuity Calculator). Both are substantial incomes, especially when added to a Full State Pension. Making the most of your pension Hopefully we’ve established the importance of continuing to save for retirement. Without it, retirement does not seem to be as enjoyable or carefree as you deserve it to be after many years of working hard. So, how can you make the most of the money you have now, to ensure that you have the income you need, later? Save it in the right place: Some people are tempted to opt out of their Workplace Pension and ‘take back’ control of their investments by contributing to a Personal Pension instead. Unfortunately, by doing so, they lose both their employer contribution and the 20% tax relief, both of which have a significant impact on the overall size of a pension fund. If you have extra money available to save for retirement, you are able to make ad-hoc contributions to most Workplace Pensions by contacting the scheme provider or your workplace’s HR department. By investing this additional money in the same place, you both make it easier to access in later life and benefit from a tax-efficient fund. Cut back on non-essentials: Don’t give up everything you love but do analyse your spending to see if there are any areas where you could make small sacrifices in order to contribute some extra cash to your pension each month. Take financial advice: A financial adviser will be able to give you tailored and structured advice which meets your needs as an individual and makes sure that your pension is in the best position to provide you with the retirement income you desire. To discuss your retirement planning in more detail, get in touch.