WORKERS could save thousands of pounds more for retirement without needing to save a penny more into their pension.
Savers can increase how much they are invested in the stock market, which could increase the value of a pension pot by as much as £100,000 by the time they retire.
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Typically you can increase the amount you’ll have in retirement by paying more into a pension each month or week through work.
But for anyone who is already saving the most they can, there’s still a way to grow a nest egg.
New figures show that a 22-year-old earning £22,437 a year and contributing the minimum, could grow their pension pot by thousands of pounds.
They can do this by increasing the amount their pension is invested in stocks and shares, or equities as they are also known.
What is pensions auto-enrolment?
HERE’s what you need to know about pensions auto-enrolment:
What is pension auto-enrolment?
Since October 2012, employers have had to enrol their staff into workplace pension schemes as part of a government initiative to get people to save more for retirement.
When does auto-enrolment apply?
You will be automatically enrolled into your work’s pension scheme if you meet the following criteria:
- You aren’t already in a qualifying workplace scheme.
- You are aged at least 22.
- You are below state pension age.
- You earn more than £10,000 a year
- You work in the UK.
How much do I contribute?
There are minimum contributions that you and your employer must pay.
Your minimum contribution applies to anything you earn over £6,136 up to a limit of £50,000 (in the tax year 2019/20). This includes overtime and bonus payments.
A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%.
What if I have more than one job?
For people with more than one job, each job is treated separately for automatic enrolment purposes.
Each of your employers will check whether you’re eligible to join their pension scheme. If you are, then you’ll be automatically enrolled in that employer’s workplace pension scheme.
Can I opt out?
You can choose to opt out, but you’ll miss out on the contributions from the government and from your employer. If you do choose to opt out you can opt back in later.
If they had 35% of their pension savings equities, by retirement at 68 they would be predicted to have a pension pot worth £125,800, calculations by Interactive Investor and LCP show.
But if they increased that to 60%, it could be worth £157,700. And if they put all their pension savings into the stock market they would have a forecast retirement stash of £225,900
The money you save into a pension is invested for you to help your money grow over time and millions of savers are now investors through their pension since auto-enrolment was introduced.
All employees aged over 22 who earn more than £10,000 year are now signed up to a pension automatically by their employer – unless they opt out.
You pay in at least 5% of your pay and your employer puts in at least 3% – a minimum contribution of 8% in total.
You also get tax relief, so instead of paying tax on the part of your salary that goes into your pension, that amount is saved for retirement too.
All this money contributed to a workplace pension goes into something called a default fund.
Your money will be invested automatically into stocks and shares (equities), bonds and some of the money is held as cash too.
Savers can choose to increase the amount they have in equities, with the hope of increasing returns.
Default fund allocation to stocks and shares varies depending on the provider and your age, and can be anywhere between 35% and 100%, research from accountancy firm EY shows.
For young savers especially, taking more risk with their pension could be the only way to ensure a decent income in retirement in years to come, and avoid having to work for longer.
What are the different types of pension?
WE round-up the main types of pension and how they differ:
- Personal pension or self-invested personal pension (Sipp) – This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
- Workplace pension – The Government has made it so it’s compulsory for employers to automatically enrol you in your workplace pension, unless you choose to opt out.
These so-called defined contribution (DC) pensions are usually chosen by your employer and you won’t be able to change it. Minimum contributions rose to 8% in April 2019, with employees now paying in 5% (1% in tax relief) and employers contributing 3%. - Final salary pension – This is a also a workplace pension but here, what you get in retirement is decided based on your salary, and you’ll be paid a set amount each year on retiring. It’s often referred to as a gold-plated pension or a defined benefit (DB) pension. But they’re not typically offered by employers anymore.
- New state pension – This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £179.60 a week and you’ll need 35 years of national insurance contributions to get this. You also need at least ten years’ worth of national insurance contributions to qualify.
- Basic state pension – If you reached the state pension age on or before April 2016, you’ll get the basic state pension. The full amount is £137.65 per week and you’ll need 30 years of national insurance contributions to get this. If you have the basic state pension you may also get a top-up from what’s known as the additional or second state pension. Those who have built up national insurance contributions under both the basic and new state pensions will get a combination of both schemes.
Dan Mikulskis, partner at LCP said: “Millions of young people in particular are currently invested in ‘default funds’ which are designed to be broadly suitable to a wide range of investors. Many of these are designed with an aim to manage risk.
“Taking more investment risk is always a tricky balance, but by moving more of their pension into growth assets such as equities, younger people could expect a better return and could save themselves having to work well into their seventies.
The older you get, generally the less risk it’s recommended you take with your pension savings, but all investors should be “looking under the bonnet” to see if they have the right level of investment risk said Mr Mikulskis.
With more flexible options for taking your pension now available, more people are also taking some cash and continuing to work and save, meaning older savers could benefit from checking their equity allocation too.
Rebecca O’Connor, head of pension and savings at Interactive Investor told The Sun: “Traditionally, people would start to ‘de-risk’ their pension pots several years before retirement.
“De-risking means reducing the allocation of equities and keeping more of your pot in cash and bonds, to reduce the risk of losses, if the stock market takes an unfortunately timed nosedive right before you retire.
“But these days, as more people are keeping their pension invested for longer and using drawdown to access it, it can often make sense to keep a higher proportion of your pension pot invested in equities, for growth, for longer.
“If you are continuing to work and earn some income through retirement, there is less need to de-risk a quite so quickly as you get older.”
By de-risking too soon, your pension pot can shrink more quickly and ideally, you want to keep as much as possible invested for growth for as long as possible O’Connor said.
Top tips to boost your pension pot
DON’T know where to start? Here are some tips from financial provider Aviva on how to get going.
- Understand where you start: Before you consider your plans for tomorrow, you’ll need to understand where you stand today. Look into your current pension savings and research when you’ll be eligible for the state pension, and how much support you’ll receive.
- Take advantage of your workplace pension: All employers are legally required to provide a workplace pension. If you save, your employer will usually have to contribute too.
- Take advantage of online planning tools: Financial providers Aviva and Royal London have tools that give you an idea of what your retirement income will be based on how much you’re saving.
- Find out if your workplace offers advice: Many employers offer sessions with financial advisers to help you plan for your future retirement.
“You don’t know how long you are going to live for after all and one way of boosting your chances of your pot lasting is to keep it growing.
“You don’t need pots of cash sitting around if you can just take out what you need, leaving the rest to hopefully continue to grow within your pension.
She added: “What is left in a defined contribution pension when someone dies can go to their beneficiaries tax-free”
Savers can find out how their pension is invested by contacting their pension provider.
Each provider will have a different process for making changes to your equity allocation, so ask them for details.
You may even be able to do this directly online and many providers have lots of information to help you understand your pension and make changes to it.
Millions of people’s pots could be worth thousands of pounds less than expected when they come to retire.
Almost one million workers with multiple jobs are missing out on pension contributions from their employers.
Thousands of savers are being urged to make a claim for compensation because of pension advice failures.
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