In our weekly series, readers can email in with any question about retirement and pension savings to be answered by our expert, Tom Selby, head of retirement policy at investment platform AJ Bell. There is nothing he doesn’t know about pensions. If you have a question for him, email us at money@inews.co.uk.
Question: In my current job, I pay 6 per cent of my salary into my pension pot and my employer is quite generous, matching that. I’m starting a new job after Christmas and it appears this is less generous. They pay the legal minimum of 3 per cent, and I pay 5 per cent. Is it worth haggling to see if they’ll improve this offer, as you would do with a salary? And will 8 per cent total be enough to ensure a good pension in retirement?
Answer: Let’s kick off by running through the basics of saving in your workplace pension. Under “automatic enrolment” rules, employers are required by law to establish a pension scheme for their employees that meets certain minimum criteria and enrol them within three months of joining the company.
You need to have earnings of at least £10,000 to qualify for auto-enrolment and be aged between 22 and state pension age (66).
The minimum total contribution under auto-enrolment is 8 per cent of “qualifying earnings”, with 3 per cent coming from the employer, 4 per cent from the employee and 1 per cent via basic-rate pension tax relief.
In 2023/24, qualifying earnings are salary between £6,240 and £50,270. For those auto-enrolled at this minimum level, the contribution will therefore be lower than 8 per cent of your total earnings.
As you suggest in your question, plenty of employers go well above the minimum required under auto-enrolment. It is therefore important when considering any new job, you look at the whole remuneration package and not just the headline salary, because perks like additional pension contributions can be extremely valuable over the long term.
Is 8% enough?
I am often asked how much someone needs to save to enjoy a “good” retirement. Unfortunately, what sounds like a simple question is laced with huge amounts of complexity.
Factors that will materially affect the answer include how old you are when you start saving, the level of your contribution, your investment returns, the age at which you decide to stop working and drawing on your pension, your life expectancy in retirement, your costs in retirement (for example, whether you still have a mortgage or rent to pay) and, crucially, what your definition of a “good” standard of living in retirement looks like.
However, for most people, auto-enrolment at the minimum level will not deliver a comfortable retirement. To give you a rough idea, let’s consider the “retirement living standards” published each year by the Pensions and Lifetime Savings Association, an industry trade body. Those standards suggest a single person outside London might need total income pre-tax of £25,983 (£23,300 post-tax) a year to enjoy a “moderate” living standard.
This assumes the person has no housing costs to pay and makes various assumptions about their lifestyle, such as holidays each year comprising two weeks in Europe and a long weekend in the UK. As such, it can only really offer you a very rough guide. You can read more about the retirement living standards here.
If we assume someone is entitled to the full new state pension of £10,600 per year and they have no other sources of retirement income, that means they need their pension to generate £15,383 a year pre-tax in 2023 terms.
For simplicity, let’s assume they will have a state pension age of 68 and when they reach that spend their tax-free cash entitlement paying off their mortgage, keep their money invested in retirement through “drawdown”, their spending goes up in line with inflation and they enjoy inflation-adjusted investment returns of 2 per cent per year post-charges, this would imply they need a pot worth around £290,000 to last until around age 90.
The contributions required to build a £290,000 fund (in 2023 terms) will, again, depend on a number of factors, including when the person starts saving and their investment returns. If we assume contributions go up in line with inflation, inflation-adjusted returns are 4 per cent post-charges and they start contributing at age 22, this would imply a total contribution (inclusive of employer contribution and upfront tax relief) of £2,100 per year. If they started saving for retirement at age 30, the annual contribution jumps to £3,100 per year.
However, given just how many assumptions I’ve had to make here, it can only at best be taken as a very rough guide. Tweak the investment assumptions or the costs in retirement, and the numbers will become very different.
Please sir, can I have some more?
Given this level of uncertainty, for most people the best way to approach retirement saving is to squirrel away as much as you can afford and make the most of the free money and tax incentives on offer. Employer contributions are a massive part of this equation, and you are perfectly entitled to haggle over them in the same way you might haggle over salary. The firm is under no obligation to accede to your request, but there is certainly no harm in asking.
