How to boost your retirement pot by £25k – and it will only cost you £136 a year
MILLIONS of Brits could boost their pension pot value at retirement by saving 1% more each month.
Most Brits have a workplace pension scheme which helps employees save for their retirement outside of the state pension.
Since October 2012, employers have had to automatically enrol workers into one of the schemes.
There are minimum contributions that you and your employer must pay.
A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%.
But workers should look at boosting the amount that they save into their pot as this could increase their nest egg substantially upon retirement, according to Wealth At Work.
If both the employee and employer increase their contributions by just one percentage point, the value of a workplace pension pot at retirement could receive a huge 25% boost.
For example, a 25-year-old expecting to retire at 68 and saving 5% of their £20,000 salary into a workplace pension would have an estimated pot value of £99,341 upon retirement.
But if they were to increase their contribution to 6% and their employer was to match this increase, they’d boost their total nest egg by £24,836 to £124,177 at retirement.
The increase would cost just £12 more per month or £136 a year.
If the same 25-year-old was saving 5% of a £30,000 salary into a workplace pension, they would have an estimated pot value of £149,011 upon retirement.
And if they were to increase their contribution to 6% they’d boost their total nest egg by £37,254 to £186,265 at retirement.
The increase would cost just £17 more per month or £204 a year.
Those with a higher salary of £40,000 a year saving 5% into a workplace pension would retire at 68 with £198,683.
But if they were to increase their contribution to 6% and get their employer to increase its contribution they’d boost their nest egg by £49,670 to £248,353.
You’ll need to ask your employer if they’d be willing to match your contributions if you choose to save more than the minimum.
Be aware that your employer doesn’t have to match your contributions.
But you can always choose to save more of your income if you want to, even if your employer doesn’t match your contributions.
Jonathan Watts-Lay, director of Wealth At Work said: “When speaking to young people, many don’t realise the huge difference a small increase in their pension contributions can make if they start in their 20s – especially if their employer offers to match it.
“Once we point out that saving an extra 1% now with their employer matching this can result in 25% more in their pension pot at retirement, saving a bit more now makes a lot of sense.”
How do workplace pensions and auto-enrolment work?
Auto-enrolment is when you’re automatically placed into your workplace pension scheme, with your contribution deducted from your pay packet.
Employers have had to automatically enrol staff into pension schemes since October 2012 to get workers saving for their golden years.
The only exception is if you’re under the age of 22 or earn under £10,000, in which case you have to ask to opt in.
But in March, MPs backed a private members’ bill that would reduce the pensions auto-enrolment age from 22 to 18.
The bill would also abolish the lower earnings limit, which the government has said would encourage employees to start saving for their retirement earlier in their careers.
The change is expected to pass into law at a later date.
The lower qualifying earnings limit, the point at which an individual’s employer must start to calculate pension contributions, is currently £6,240.
A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%.
Crucially, the contribution you make as an employee is deducted before tax.
For example, if you pay 20% tax on your earnings, and your pension contribution is £100, this only really costs you £80 as this is how much that amount would have been worth after tax.
While opting out of a workplace pension would increase your monthly salary, it’s best to only do this as a last resort, as you’ll have less in later life.