Over 1million people missing out on hidden pay rise – how to avoid losing out on £250,000 free money
OVER a million employees are missing out on free money because they have opted-out of their company’s pension scheme.
The latest government figures show that around one in ten eligible employees have opted out of their workplace pension.
With figures showing that roughly 11million savers have been enrolled into these schemes since 2012, that means that around 1.2million may have missed out on free cash for retirement.
On top of that, almost 106,000 working people have not been enrolled into their workplace pension because their earnings come from more than one job – and 70% of those people are women, research by Citizens Advice has revealed.
A huge number of people earning between £6,240 and £10,000 a year are also missing out because they are not automatically enrolled – but they can choose to be part of the scheme if they want.
How much is the workplace pension worth?
When you join a company and earn over £10,000, you are “automatically enrolled” into its workplace pension scheme.
Anyone enrolled in a workplace pension has a minimum contribution rate of 8% but crucially, not all of this comes from your salary.
A minimum of 3% is paid by your employer, and basic tax rate payers will also have 1% of their contribution paid via tax relief.
The average salary for a full-time worker in the UK is £34,963, according to the Office for National Statistics (ONS).
Between the tax relief from the Government and the payment from the company, a typical earner would therefore receive £1,398.52 a year in free money towards their retirement.
If you worked for 35 years, that adds up to £48,948.20 in free cash from your bosses and the government.
The money in your pension is then invested with the aim of growing the pot over time.
If you got returns of 5%, the pot would be worth £269,998 when you retire.
Even with very low growth of 2% it would be worth £97,891, and with high growth of 8% you’d have a pot worth £723,713.
Of course, with retirement ages rising to 67, many people work far long than 35 years, meaning the gains could be even higher.
But ultimately, in return for just 4% of your salary each month, you get hundreds of thousands of pounds of free money.
How to enrol in your pension
If you have opted out of auto-enrolment, your employer must re-enrol you every three years.
But you don’t have to wait that long to get back involved.
You can ask to rejoin your workplace scheme at any time, although your employer only needs to carry this out once every twelve months.
However, some employers will add you to the scheme immediately.
To be eligible for auto-enrolment, you need to meet the following criteria:
- Be aged between 22 and State Pension Age
- Earn over the earnings threshold (£10,000), and
- Work, or ordinarily work, in the UK and have a contract of employment
If you earn between £6,240 and £10,000, you don’t qualify for auto-enrolment, but you can still ask to join and your bosses will still have to pay employer contributions.
If you earn less than £6,240, the business doesn’t have to pay contributions (although some choose to) but you will still benefit from tax relief from the Government and investment growth.
What are the different types of pensions?
WE round-up the main types of pension and how they differ:
- Personal pension or self-invested personal pension (SIPP) – This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
- Workplace pension – The Government has made it compulsory for employers to automatically enrol you in your workplace pension unless you opt out.
These so-called defined contribution (DC) pensions are usually chosen by your employer and you won’t be able to change it. Minimum contributions are 8%, with employees paying 5% (1% in tax relief) and employers contributing 3%. - Final salary pension – This is also a workplace pension but here, what you get in retirement is decided based on your salary, and you’ll be paid a set amount each year upon retiring. It’s often referred to as a gold-plated pension or a defined benefit (DB) pension. But they’re not typically offered by employers anymore.
- New state pension – This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £203.85 a week and you’ll need 35 years of National Insurance contributions to get this. You also need at least ten years’ worth to qualify for anything at all.
- Basic state pension – If you reach the state pension age on or before April 2016, you’ll get the basic state pension. The full amount is £156.20 per week and you’ll need 30 years of National Insurance contributions to get this. If you have the basic state pension you may also get a top-up from what’s known as the additional or second state pension. Those who have built up National Insurance contributions under both the basic and new state pensions will get a combination of both schemes.
The benefits of higher contributions – more free money
Lots of employers in the UK offer something called “matching”, where if you put more money into your scheme they will too, up to a limit.
For instance, they could say that if you pay 6%, they will also pay 6%, though each business will have different rules.
There will always be a cap, so check beforehand.
If your company offers this scheme, it’s well worth taking advantage of, as it means even more free cash for your retirement and you’ll get the tax relief boost too.
Even if your company doesn’t offer matching, it’s still worth increasing your contributions if you can.
The combination of tax relief and compound interest mean that even saving a little extra can have a powerful impact on what you’ll have at retirement.
Even if they won’t match, some employers may increase their contributions slightly if you up yours.
Research by broker Interactive Investor found that for someone earning £30,000 a year, contributions of 8% would yield a final pot of £395,391.
But increasing that to 10% – just a 2% increase – would mean a final pot of £494,271 – almost £100,000 more.
Pushing contributions to 12% yields a pot of £593,115, meaning that extra 4% saving earns you £267,021.
Alice Guy, head of pensions and savings at Interactive Investor, said: “It’s vital to keep an eye on your pension pot size, and what that could mean for you in retirement.
“Consider increasing your pension contributions slightly if you have a pay rise, because minimum contribution levels are often not enough for a comfortable retirement.
“Even small increases in contributions could have a dramatic impact on your long-term pension wealth, potentially giving you more financial freedom in retirement.”
How do I consolidate my pension?
IF you have several workplace pensions that you're no longer paying into, you might be better off consolidating them into a single pot.
There are several advantages to this.
The first is that by having your savings all in one place, you’ll only pay one set of fees.
You can also choose which pension provider you want to transfer the different savings to, so you can pick the best one for you.
It also makes it easier to keep track of your money.
You might want to move all your money to whichever of your existing pots has the best fees, or you could move it all to your current employer pension (if you have one).
Alternatively, you may wish to move money to a private pension or use a consolidator service, such as Pension Bee, Aviva, or Wealthify.
Make sure you compare and contrast your options carefully so that you’re picking the best home for your savings.
You’ll need to look at fees but also might want to consider the investment options available.
If any of your pots are over £30,000 you’ll need to get independent financial advice, but even if you have lots of smaller pots you should consider speaking to an independent financial advisor (IFA).
You can use Unbiased or VouchedFor to find a recommended advisor near you.
Also ask whether you’ll be charged a fee to exit your existing provider and to join your new provider, plus whether the age at which you can access your pension is different – for most people this is currently 55, but is set to rise to 57.
You also need to ensure the pension you’re leaving doesn’t come with valuable added perks, or you could lose out.
Stay alert for pension transfer scams as fraudsters often target people transferring their pension with promises of investments that are too good to be true.
How big does a pension pot need to be?
There’s no magic number that will tell you how big your pension needs to be, because it will depend on things like whether you rent or own your home and what level of income you are used to in your working life.
The Living Pension sets a minimum income standard, which is the cost of achieving a socially-acceptable minimum adequate standard of living.
It is determined by the public through focus groups and is updated regularly, over a four-yearly cycle, to ensure it reflects changes in expectations.
For homeowners, this is calculated at £13,531 per year, for renters of social housing it’s £18,195 a year, and for private renters it’s £20,691 a year.
Alexandra Miles, senior DC (defined contribution) fund manager at Legal & General Investment Management, crunched the numbers and found that on top of the full state pension, this means that homeowners would need a pot of £43,901, social renters would need £156,700 and private renters would need £217,072.
However, this is assuming living on only absolute essentials.
The Pensions and Lifetime Savings Association (PLSA) says that for a moderate retirement, retirees need around £31,000 a year – a similar amount to the median salary in the UK.
Ms Miles’ research shows that to achieve this, someone who is on track to get the full state pension will need additional savings of £473,000.
This sounds like a huge number, but by opting into your workplace pension as soon as possible, it’s far easier to achieve.
Someone on a £30,000 salary can expect to generate a pot worth £395,391 if they stick with minimum auto-enrolment contributions, Interactive Investor found.
Raising these to 10% (including at least 3% from the employer and more than 1% from tax relief) means you reach the target for a moderate retirement.
Anything you save beyond this will push you towards the PLSA’s comfortable retirement target, which Miles says needs a pot of £759,096 (on top of the state pension).
“The current state pension isn’t enough to meet any of these targets, and depending on how high your aspirations are set, you may well need to fund up to 3x it yourself from private pension savings in order to meet your chosen target,” she said.
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