Investors keen on a comfortable retirement know not to rely solely on the state provided pension to keep them out of pension poverty. But new data has now revealed that even workplace pension schemes may not be sufficient to provide members with a sufficient retirement income.
Workers are being urged to look elsewhere to supplement their pension pot as workplace schemes will not be enough to plug the “pensions gap” – the void between what pensioners need to live in comfort and the funds they actually possess.
A study by Barclays Corporate & Employer Solutions has found the majority of consumers paying into a workplace pension know their scheme savings will not meet their needs – although they are relying on these savings to provide the bulk of their retirement income.
These findings back up calculations done by stockbroker Hargreaves Lansdown that show the current average contributions into workplace schemes will not be sufficient for workers to retire on.
“The only person likely to hit a standard of living in retirement comparable to their pre-retirement income is a worker who starts saving aged 22 years old earning £15,000,” said Hargreaves head of pensions research Tom McPhail.
“For everyone else there is a gap between the retirement income they are likely to experience and where they would probably want to be, based on an assumed ‘replacement rate’ income in retirement.”
Barclays research found that eight in 10 pension savers would expect to be told by their employer if they were not saving enough for retirement – although this is not currently the responsibility of the provider. Scheme members admitted feeling they had “little influence in the pension process” and blamed the complex and ever-changing nature of the pension system for their lack of understanding.
The Financial Conduct Authority recently came to the same conclusion that pensions were over-complicated, but it will be another year until their investigations bear fruit.
In the meantime, investors should not wait for the changes in the new auto-enrolment system to maximise their own workplace contributions.
Currently employers are only obliged to match up to 1% of your salary in pension contributions, and a shocking 90% of firms only do the bare minimum.
From 2018, when auto-enrolment is fully implemented this will jump to a minimum contribution of 3% from the employer. Employees will be required to contribute 4% of their salary and there will be a 1% tax relief from HMRC.
But workers keen to maximise their pension pot should up their contributions by as much as is affordable now, in order to get the full benefit of compound interest.
Those with a keen interest in the markets should also use their personal pension SIPP allowance to take long-term bets on higher risk assets. As you cannot withdraw funds from a SIPP until you retire it is a great product in which to execute a buy and hold strategy.
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