Everyone has dreams of what they’ll do when they retire, from foreign adventures to finally putting their feet up.
But millions are saving too little for the lifestyle they desire — and could run out of money in retirement unless they act.
As many as 72 per cent of workers are under-saving for even a moderate retirement income, according to trade body the Pensions and Lifetime Savings Association.
However, working out if you’re putting away enough or are set for a shortfall is not straightforward.
Here, Money Mail’s checklist gives the ten telltale signs that you could run out of cash when retired — and what you can do to turn it around.
Boost: A small increase in pension payments can have a huge impact. If you raised your contributions from 5% to 6% at the age of 22, you would have an extra £54,000 by retirement
1) You have a pension through work -but don’t know how much is paid in
If you earn at least £10,000 a year and are aged between 22 and state pension age, you are likely to have a workplace pension, provided by your employer.
The good news is you will have been automatically enrolled into the scheme when you began your job, unless you opted out.
Unless you have checked your pension plan, there is a high chance you are not paying in enough for a comfortable retirement.
Under the workplace pension rules, you must pay in a minimum of 5 per cent of your salary, and your employer at least 3 per cent.
Many employers default to these minimums unless you query it. But most experts believe saving a combined 8 per cent of your salary will not be enough to secure even a moderate retirement lifestyle.
ACTION: Ask your employer to increase your contribution.
When day-to-day finances are hard enough to juggle, putting more away in a pension can feel like an impossible task. However, just a small increase can have a huge impact.
If you raised your contributions from 5 per cent to 6 per cent at age 22, you would have an extra £54,000 by retirement age, according to calculations by pension provider Standard Life.
If you increased them to 7 per cent, you would have an additional £108,000, and to 10 per cent an extra £271,000 — a total pension pot of £705,000.
Your employer will be able to tell you how to increase your contributions. Some may even match your rises, giving a bigger boost.
2) You are unsure what proportion of income to put into your pension
Working out how much you will need for retirement is not easy, as it depends on complex variables such as how long you might live, what lifestyle you will want and whether you will still be supporting dependants or paying off a mortgage.
There are a few rules of thumb. One is that the proportion of your income you save for retirement should be the equivalent of half your age when you begin saving.
Rules: Under the workplace pension rules, you must pay in a minimum of 5% of your salary, and your employer must put in at least 3%
For example, if you start saving for retirement as a 22-year-old, you will need to put away 11 per cent of your income from then. If you start at age 40, you would need to save 20 per cent.
ACTION: Try the rule of thumb above and if you seem to be falling short, increase your contributions now.
If you have taken — or may need to take — time out of the workforce, you should save even more, if you can. It is never too late to start retirement saving. But if you begin late, you will need to save more.
3) You are, or have been, self-employed
People who work for themselves are among those most at risk of a pension shortfall as only about a third are saving into a pension, says the Association of Independent Professionals and the Self-Employed.
Most employees are automatically enrolled into a company pension scheme, yet there is no equivalent arrangement for the self-employed.
ACTION: Rebecca O’Connor, a director at pensions firm PensionBee, says: ‘It’s a sweeping generalisation, but self-employed people are among those most at risk of under-saving for retirement, because often it’s hard to generate enough income this way to both make ends meet and set cash aside for the future.
‘A good instant remedy is to start a personal pension and set up a small monthly direct debit.’
Setting up a personal pension is easy and can be done by you as an individual or through your company.
You may not get employer contributions as those working for a company do, but you will still benefit from tax relief.
This means that for every £80 you put in your pension, the Government will top it up to £100, if you are a basic-rate taxpayer. Higher-rate taxpayers will get £120 for paying in the same £80.
4) You have lost track of your old pensions
Savers have lost track of close to three million hard-earned pensions worth a staggering £27 billion in the UK. It equates to just under £9,500, on average.
Pensions are alarmingly easy to lose track of, especially if you have changed jobs, name or moved home and failed to alert all your old pension providers.
Losing out: Savers have lost track of close to three million hard-earned pensions worth a staggering £27bn in the UK. It equates to just under £9,500, on average
And once lost, pensions can be difficult to find again. If you have lost track of your pensions, you will miss out on the retirement income that they could afford you.
ACTION: The Government’s Pension Tracing service is a good starting point for finding lost pensions. It can be accessed at gov.uk/find- pension-contact-details.
Money Mail has also collaborated with former pensions minister Sir Steve Webb to put together a guide to helping you boost your retirement wealth by locating old pensions.
Find it here.
5) You told your employer that you plan to retire early
When you join a company pension scheme, you will typically be asked when you want to retire.
It is easy to respond optimistically — that you plan to retire sooner than you actually do — in the hope that this will leave you better placed to retire early.
But answering optimistically can lead to a smaller retirement pot. That is because many pension schemes start to move your nest egg into safer investments in the final years running up to your target retirement date.
The idea is this would protect you from any major dips in the value of your investments just before you retire.
However, safer investments tend to have lower returns than other, riskier, options and so may lead to a smaller pot.
ACTION: Check the target retirement date on your company pension scheme. If it is on the optimistic side, change it to a later date.
You can also check what types of investments you hold in your pension. If you are unlikely to need to tap into your pension pot for years, you could invest in riskier investments.
6) You bought your home late in life
There are many pension calculators online which will give you a sense of how much you might need in retirement — and how much money your pension pot may pay if you keep saving at the same level until you cease work.
The Pensions and Lifetime Savings Association will illustrate how much money you will need for a basic, moderate or comfortable retirement lifestyle. Visit retirement livingstandards.org.uk.
Financial burden: Over a million people have taken out a new mortgage that will run past state pension age in the past three years alone
Most calculators and pension lifestyle projections assume you will own your home outright by retirement so will not need to budget for rent or mortgage.
More than a million people have taken out a new mortgage that will run past state pension age in the past three years alone, according to a Freedom of Information request by pension consultancy LCP.
ACTION: If you will not own your home outright by the time you retire, you must factor that into your budget.
If you use pension calculators to estimate how much you will need in retirement, ensure that you take your rent or mortgage into account.
7) You have opted out of auto-enrolment
Most workers are automatically enrolled into a company pension, but can opt out at any point.
Brian Byrnes, head of personal finance at Moneybox, says: ‘Even short gaps in your pension contributions can have a big impact over time, so maintaining some form of contribution can help you stay in the habit of regularly saving for retirement, which is vital.’
ACTION: If you have opted out, ask to start contributions again. That way you will also receive contributions from your employer — and a Government top-up.
8) You’re paying too much in fees
No pension scheme is free — you usually have to pay both the provider of the scheme and for the underlying investments you hold.
But overpaying fees by even half a percentage point could knock tens of thousands of pounds off the value of your pension.
Take, for example, a 40-year-old who has £25,000 in their pension. If they paid 1.5 per cent in fees, they would have £64,000 by the age of 67, assuming their pot grows by 5 per cent a year, according to retirement firm Profile Pensions.
But if they paid 1 per cent in fees, their pot would be worth £73,000.
ACTION: Check what fees you’re paying. Shop around to see if your scheme is competitive or if you could get a cheaper service.
You need a good reason to pay more than 1 per cent a year. You are unlikely to be able to move from a workplace pension scheme, but you can still check that you’re not paying more than is necessary for the underlying investments.
9) You have multiple low-earning jobs
You should be automatically enrolled into your company pension scheme if you earn at least £10,000.
However, if you have several low-earning jobs there is a risk you do not breach this threshold with any, so do not qualify for a company pension.
ACTION: Open your own personal pension and start paying in an affordable monthly amount.
It’s particularly important when you are not in a company pension scheme but can afford to put money away for retirement.
10) You have taken time out of the workplace
Even a year not paying into a pension can hurt your retirement savings. But it is often unavoidable due to caring responsibilities, ill health or redundancy.
ACTION: Keep your state pension on track. For each year you work and pay National Insurance, you are earning credits towards your state pension.
However, you can claim National Insurance credits even when you are not working.
You may be able to claim if you take time out for childcare or are receiving Jobseeker’s Allowance, disability or sickness benefits.
This means your state pension will not be hurt by any time out of the workplace. See: gov.uk/national-insurance-credits.
If you take time out to look after children while your partner works, they can make contributions into a pension for you, if they wish.
- What are your tips for saving enough for a comfortable retirement? Email: rachel.rickard@dailymail.co.uk
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