Are you putting enough money into your pension?

A recent report from the Phoenix Insights research team, suggests that millions of people in the UK are undersaving into workplace DC (Defined Contribution) pension schemes [1]. The modelled consequences, based on the results of a survey of 16,500 people aged over 24 who have not yet retired, make for grim reading.

Of those planning to retire between 2025 and 2060, "undersavers" constitute the largest group (38.5%) and a further 15.2% will be financially struggling in retirement. In short, your workplace DC pension scheme may not give you the pension you had imagined, expected or hoped for. The results of the analysis also point to a lack of engagement on pension issues, with around 1/6 of survey responders unaware of how much they were contributing, or what income it might lead to in retirement.

It is not only DC scheme contributors who could be financially struggling in retirement. If you are one of the 4.2 million self-employed people in the UK (increasingly in low paid 'gig' work), you may scoff at the notion of entitled workers moaning about the limits of their workplace perks and benefits, such as DC schemes, But then the cost of living crisis impacted many workers in all sectors and paying into a pension can be a stretch if it is already difficult to meet daily expenses. The Institute for Fiscal Studies (IFS) suggest that 55% of self-employed people will enter retirement solely dependent on the state pension. Curently, only 20% of self-employed people enrol into pension schemes [2].

So, how much should you be saving in order to meet your needs or retirement aspirations? This will of course vary according to your personal circumstances, life expectancy, other savings or assets and a myriad of other issues. Which is where speaking to a suitably qualified advisor can help. But for the purposes of this piece I am going to stick with the example of self-employed people, who are sometimes neglected in discussions about occupational pensions.

Self-employed people "have lumpy income and cash flow issues" [3]. There is no equivalent of pension scheme auto-enroiment as exists for salaried workers, although options in this regard are currently being considered by the new UK government. If you are self-employed there is no employer to top up your contributions for you. Charges are usually higher for personal pensions (the first 'go to' for the self-employed) than they are for workplace schemes.

The IFS report I mentioned [2] uses the example of an average 20-34 year old self-employed person who is not currently paying into a pension scheme and earns between £22.2k and £39k a year. To get them back to "adequacy rates" concerning minimum income requirements in retirement, they would need to save 9% of their gross income. Those aged in their 50s earning the same amount would need to save 18% of their income in order to achieve minimal recommendations. Remember, these percentages are for a 'minimal' income. If you aspire to more than that, then you will need to save and accumulate more.

I was aged 20-34 when I began my own pension contributions and retirement planning. Back then, the calculation I did in order to work towards an early retirement, suggested I needed to save c.19% of my gross income. That was easy until the day I became a father. Then there were the changes to the pension scheme benefits over the years. Finally, topped off by the vagaries of trying to grow a pension pot during and after the Covid19 pandemic. These issues meant that when I came to my chosen retirement date, the personal pension pot was around 10% less than planned for. Which brings me to the final lesson: You can plan ahead, but you cannot predict future events.

Gavin Daker-Whire BA, PhD, DipFA
Retirement Coach

Next Steps

1. Check your DC or other occupational pension scheme by using an online account or paper statements. Revisit what you might get in retirement. Could you afford to pay in more?

2. If you are self-employed, think about personal pensions or other ways of putting aside money for retirement (e.g. property or ISAs). If you already run an investment portfolio or own business property, there can be tax advantages to holding this within a SIPP (Self Invested Personal Pension). Research SIPPs or consult a qualified professional.

Tags: pensions, pension schemes, workplace pension, direct contribution, DC pension scheme, self-employed, retirement income, pension contributions