Is your workplace pension going to be enough?
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 that their retirement is sorted. But is it? With most people paying the absolute minimum allowable into their pension, is their pension going to be enough when they retire?
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.
Where workplace pensions are flawed is that once 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?
A generous employer contribution could be as much as 20% of your annual salary. On average you should expect a contribution of between 7% – 14% from your employer in the private sector. Your employer isn’t necessarily bad if they pay less than this.
There may be several compensatory factors such as a good salary, good working conditions or flexible hours, so don’t judge your employer on their contribution levels alone.
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. This is because 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 come back 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 and 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.
What is important is to work out whether your workplace pension on its own 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 you determine whether your workplace pension was going to be enough.
