Is your workplace pension going to be enough to retire on?
The government introduced auto-enrolment in 2012 to help more people save for their retirement. At first glance, it has been a rip-roaring success. Workplace pension participation has doubled from 42% in 2012 to 86% in 2021. It started off with the biggest employers enrolling new staff into pension schemes. Soon, smaller employers came on board until one-man bands and sole traders were auto enrolling their staff.
Great news, right? Well, yes. The trouble is that once someone joins a pension scheme through work, they tend to believe their retirement is sorted.
But is it?
With most people contributing the absolute minimum allowable to their retirement fund, will their workplace pension be enough to retire on?
What you will learn in this article
- How to evaluate if your workplace pension will be enough to retire on
- A comparison of workplace pension vs personal pensions
- How much you should pay into your pension
- The importance of regularly reviewing and updating your pension plan
- Considerations when joining a pension scheme later in life
Is a workplace pension better than a personal pension?
There are several ways a workplace pension is better.
First, your contribution is taken before tax which could reduce the overall tax paid on your salary. Secondly, your employer will contribute to your pension. They are obliged to pay at least 3% of your salary, whilst you, as a member will have to pay 5% to make a total contribution of 8%. Much better than nothing.
Workplace pensions are flawed because once they are set up, not much thought goes into them. Members of the scheme are left to their own devices, and important decisions like investment strategy, retirement objectives, risk, and contribution levels are rarely reviewed. A personal pension, on the other hand, tends to come with a financial adviser who would help you with those important choices.
What is a good amount to pay to your workplace pension?
One of the first steps is understanding how much money you need to retire and whether you are on track. A generous employer contribution could be as much as 20% of your annual salary. On average, you should expect a contribution of between 7% and 14% from your employer in the private sector. Your employer isn’t necessarily bad if they pay less than this.
Several compensatory factors, such as a good salary, good working conditions, or flexible hours, may exist, so don’t judge your employer solely on their contribution levels.
What you contribute personally is up to you and mainly depends on your retirement objectives. Your age at the time of joining, other pensions you may have, investment strategy, what you want out of it and attitude to risk are all things to consider.
Related reading: How much should you pay into your pension?
Is it worth joining when you are older?
Yes! It’s never too late to save, even if you join a workplace pension later in life. Every time you join a workplace pension, you get contributions from your employer and extra money from the government through tax relief. This money will all return to you even if retirement is around the corner. So yes, as a savings plan, it makes complete sense.
Whether you’ll have enough to have a comfortable retirement is a deeper and more complex question. It involves an assessment of all your assets and liabilities and what you plan to do in retirement. The age at which you retire is also an important consideration, as is your projected state pension.
It is important to work out whether your workplace pension will serve you well when you need it most. Everyone is individual, and what works for me may not necessarily work for you. This is where using a professional pension advice service could help. They could help you identify your retirement goals and objectives and put a plan in place to achieve them. Most importantly, they could help determine whether your workplace pension would be enough to retire on..
Related reading:
- Getting retirement ready – Key steps to achieving a comfortable retirement
- 5 ways to avoid pensioner poverty
- Is a SIPP better than a personal pension?
Article FAQs
Here are some answers to questions you may have after reading this article
How can I determine if my workplace pension will be sufficient to retire comfortably?
To assess if your workplace pension will be enough to retire on, consider the following factors. Start by calculating your future financial retirement needs, comparing them with your current pension savings. Then, take the time to fully understand if your workplace pension will offer you a comfortable retirement.
What factors affect whether my workplace pension will be enough to retire on?
Key factors include:
- The value of your other savings and investments
- Current regular and lump sum pension contribution levels
- Your expected retirement age
- How much you need to retire on
Assess these to gauge if your workplace pension will meet your future retirement needs.
When should I start adjusting my workplace pension contributions?
You should adjust your contributions if your retirement plan projections indicate a shortfall. If so, try using our pension shortfall calculator to arm yourself with the right information.
It would also be wise to adjust you pension contributions if your income and financial situation change to ensure sufficient retirement savings.
For example, when we earn more our lifestyle often changes. Keeping you pension contributions in line with salary increases will help maintain a standard if life you are used to in retirement.
Why is it important to regularly review my pension plan?
Regular reviews are crucial to adjust for changes in income, expenses, and market conditions.
This ensures your pension plan stays aligned with your retirement goals, helping you to adapt strategies and make informed decisions for a secure financial future.
How can I estimate my retirement expenses accurately?
To estimate retirement expenses accurately, start by evaluating your current spending habits and consider your desired lifestyle changes in later life.
Draw up a detailed budget of all of the potential outgoings you will have – fixed, variable, and ad hoc. Be truthful with yourself, and don’t cut corners.
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Then, factor in inflation, which as history shows, tends to rise over time. Inflation means the true value of your money and spending power goes down over time.
Additionally, include potential travel, hobbies, and other activities in your calculations to create a comprehensive and realistic retirement budget.
