MILLIONS of people now pay into a pension automatically through work.
But these pension pots could be worth thousands of pounds less than expected when they come to retire.
Bosses have had to automatically enrol staff into pension schemes since 2012 to get workers saving for their golden years.
Staff and employers both contribute to the scheme, putting in a minimum of 8% of their wage in total.
But new research suggest that this amount is no longer enough and could leave people with as much as £87,000 less when they retire.
The minimum contribution of 8% is based on forecasts of how much people will need to live off when they retire.
What is pensions auto-enrolment?
HERE’s what you need to know about pensions auto-enrolment:
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
- You work in the UK.
How much do I contribute?
There are minimum contributions that you and your employer must pay.
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.
A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%.
What if I have more than one job?
For people with more than one job, each job is treated separately for automatic enrolment purposes.
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.
Can I opt out?
You can choose to opt out, but you’ll miss out on the contributions from the government and from your employer. If you do choose to opt out you can opt back in later.
The forecast includes an estimate of how much their pension pot will grow while it's invested in stocks, shares and bonds over their working life.
According to research from Interactive investor and LCP, investment growth is now lower than a decade ago.
It means someone now needs to put in 12% to achieve the same amount.
Based on growth forecasts from 2007, a 22-year-old earning a salary of £22,437 and contributing the minimum of 8% would build up a pension pot of £131,298 by the age of 65.
But based on growth forecast from 2017, which are lower, this amount would be £84,604 – nearly £50,000 less.
And by the age of 75 the difference is £87,000.
How much could your pension grow?
Investment growth forecast for your pension can impact how much you’ll have in retirement, and also how much you think you need to save now.
Here's how different rates of growth can leave you with different sized pension pots as you save through your working life.
At age 40
- With 4.2% growth: £32,433
- With 2.4% growth:£27,442
At age 65
- With 4.2% growth: £131,298
- With 2.4% growth: £84,604
At age 75
- With 4.2% growth: £203,286
- With 2.4% growth: £116,052
Forecasts of how your pension will grow are shown on your annual pension statement, which you should receive every year from your employer or pension provider.
The amount is based on a number of factors, including when you've said you plan to retire, your age now and when you started paying in, as well as fees.
But the assumptions for investment growth do not reflect the market, experts say, and it could leave millions of workers not paying enough into their pension pot.
Becky O’Connor, head of pensions and savings at interactive investor, said: "This report highlights the impact of lower forecast investment growth on pension pots and the profound implications for the generations of workers whose retirement pots are fully exposed to the fortunes of global markets, without many even knowing.
“‘Lower for longer’ investment growth could mean the difference between scraping-by and being comfortable in retirement, but the impact of stock market performance on retirement outcomes may be poorly understood.
How to fix a smaller pension
To avoid the shortfall and boost your pension pot, there are a number of steps people can take.
The report suggests always using the latest assumptions and forecasts, so your most recent annual statement or forecast from your pension and not old paperwork that's out of date.
Using different tools for calculating retirement estimates can also give you a better picture of how much your retirement is estimated to be.
For instance the Money Advice Service pension calculator tool is set at 5%, but the Which? tool shows calculations for growth of 4% and 2%.
Top tips to boost your pension pot
DON’T know where to start? Here are some tips from financial provider Aviva on how to get going.
- Understand where you start: Before you consider your plans for tomorrow, you'll need to understand where you stand today. Look into your current pension savings and research when you’ll be eligible for the state pension, and how much support you’ll receive.
- Take advantage of your workplace pension: All employers are legally required to provide a workplace pension. If you save, your employer will usually have to contribute too.
- Take advantage of online planning tools: Financial providers Aviva and Royal London have tools that give you an idea of what your retirement income will be based on how much you're saving.
- Find out if your workplace offers advice: Many employers offer sessions with financial advisers to help you plan for your future retirement.
Dan Mikulskis, partner at LCP, said: "Firstly, get up to date with your pension and where it is – you may have one and not know it – it’s been a legal requirement for most employers to enrol staff since circa 2012."
For those with several pensions from previous employers, it could be worth consolidating them, and those who are contractors or self-employed will need to set up a pension themselves.
He added: "Some employers offer matching (for every pound you save, they will match it, up to a point), this is usually worth taking up – it is a lot like “free money”.
"So it is worth investigating how much you are contributing, and whether you are getting matching – ask your employer via the benefits or HR departments."
He also suggests reviewing your pension contributions, especially at crucial life moments.
Mr Mikulskis said: "If you get a pay rise use it as a trigger to see if you could increase your pension savings rate, effectively earmarking some of that pay rise to go straight into your pension.
"At future birthday milestones, for example 25, 30, 35, 40, remember to review your contribution rate. If you are under 40 it may be worth looking into a Lifetime ISA.
"Finally, have a look at what your pension is investing in – think of yourself as an investor now.If you are a younger investor you want to make sure your pension is getting the most growth that it can, and for that you probably want more in stock markets. You may also want to check it is being invested in sustainable companies."
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