Saving an extra 1% of your salary now can boost your pension pot by 25%
SAVING an extra 1 per cent towards your pension now could boost your retirement pot by 25 per cent.
This is by using your employer's auto-enrolment scheme, which requires workers to pay in a minimum of 5 per cent of their salary into a pension.
At the same time, employers need to deposit at least 3 per cent on top.
But these are just minimum requirements as you can make additional contributions if you want to, while employers are often willing to contribute more if you do the same.
Combined with the fact that the contributions come out before tax is deducted, and it could give you a bigger pot to live off or the choice to retire early.
A 25-year-old worker earning £25,000 who started saving 6 per cent would boost retirement savings by an extra £15,522 - 12.5 per cent - by the time they retire at 68, according to calculations by financial adviser Wealth at Work.
What is pension auto-enrolment and how does it work?
HERE's what you need to know
- 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 in 2019/20
- You work in the UK - How much do I contribute? There are minimum contributions that you and your employer must pay.
Minimum contributions are being gradually increased over time.
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.
From April 2019, a minimum of 8 per cent must be paid into the pension, with you contributing 5 per cent and the employer paying at least 3 per cent. - What if I have more than one job? For people with more than one job, each job is treated separately for automatic enrolment purposes. You can still opt out of individual schemes if you want.
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.
It means an extra £250 a year would go towards your pension, but it'd reduce take home pay by just £170 a year as the contributions are taken before tax is deducted, the firm added.
If the same worker's employer matched these additional contributions, the savings would rise by £31,044 to £155,221 over the years until retirement.
This is more than 25 per cent bigger than if you'd kept paying in the minimum.
The figures assume that your salary rises by 2.5 per cent each year and that your savings benefit from an annual investment return of 5 per cent.
Wealth at Work director Jonathan Watts-Lay said: "Many don’t realise the difference a small increase in their pension contributions can make if they start in their 20s, compared with starting in their 30s or 40s.
"If you can afford to put an extra 1 per cent of your salary into your pension, it will make a significant difference, especially if you start early, and if your employer will match it."
The auto-enrolment scheme was introduced by the government in 2012 to encourage workers to save for retirement.
The minimum amount you pay in is being gradually increased over time but you can boost it yourself by being proactive in finding out exactly how far your employers are willing to go in terms of upping their contributions.
Unfortunately, not everyone will be able to benefit from doing this though as it all depends on how much you employer is willing to contribute to your pension.
More on money
The UK's youngest workers are losing out on £20,000 towards retirement due to a government pension reform delay.
Meanwhile, boosting your monthly pension payments by 2.5 per cent can help you retire eight years early.
Worried about retirement? Check out our round-up of how to avoid a pensions crisis and make sure you’ve saved enough.