What you need to know about your workplace pension

The introduction of auto-enrolment means more people than ever are saving into a workplace pension. It’s a step that could help improve the future financial security of millions of people.

But, if you’re not engaged with your pension savings, you may not be getting the most out of them or putting enough away for retirement.

While auto-enrolment sets a minimum employer and employee contribution level, which is set to increase in April 2019, this may not be enough for the retirement lifestyle you want. If you’re among the 82% of employed adults that have a workplace pension but feel you know little about it, you’re not alone:

• 55% don’t know how much their pension is currently worth;
• 62% don’t know how much their savings will be worth at the point of retirement; and
• only 42% think they’re on track to achieve their planned retirement income.

If you’re going to meet your retirement aspirations, we believe that regularly checking your pension and assessing if it’s still right for you is crucial. But what things should you know about your workplace pension?

Contributions

The first place to start when learning more about your pension is the contributions that are made every month. If you’ve been auto-enrolled into your workplace pension these will be set at the minimum level. You can, however, choose to increase it.

For those eligible, the current minimum employee contribution is 3% of pensionable earnings, rising to 5% in April 2019. The employer minimum contribution level is currently 2%, increasing to 3%. Your contributions should be displayed on your pay cheque each month, allowing you to keep track of how much you’re depositing. You can increase your contributions by making additional regular deposits or a lump sum.

It’s worth checking your company’s policy on pension contributions. They may increase their contributions if you do the same, for example, effectively boosting your pension with ‘free money’.

Level of tax relief

Pension contributions also benefit from tax relief, making it one of the most efficient ways to save for retirement. Tax relief means some of the money you would have paid in tax on your earnings goes back into your pension. It’s an incentive that helps your retirement savings grow quicker.

The amount of tax relief your contributions benefit from will depend on the highest rate of income tax that you pay. For basic-rate taxpayers, this is 20%. So, to boost your pension by £100, you only need to deposit £80 from your own pocket. For higher-rate taxpayers and additional-rate taxpayers, the tax relief rate is 40% and 45% respectively.

Understanding how tax relief benefits your pension savings can help make your end goal seem more manageable.

Current value

It’s impossible to understand how your pension savings are adding up if you don’t keep track of the value. Despite this, less than half of pension savers know the current value of their pension. With many funds allowing you to use an online portal to view how your contributions are adding up, there’s no excuse for not keeping on top of this. Seeing how your pension grows can give you the boost needed to keep contributing.

Projected value at retirement

Much like your current value, your projected value is something you should keep an eye on too. It can help you understand how your current provisions are expected to grow between now and your retirement. Many providers will now display this on a digital dashboard, as well as on your annual statement. While it’s something only four in ten people know, it’s a crucial factor for calculating if your retirement savings will leave you with an income shortfall. Knowing the figure means you’re in a better position to take steps to remedy this if necessary.

The projected value is based on estimates of how investments will perform. While it’s not a guaranteed value at retirement, it does give you a useful indicator.

Risk profile

Your workplace pension will typically be invested. If you’ve been auto-enrolled, this means your contributions will usually be going into a default fund. But this may not be the right risk profile for you.

Many default funds will take a balanced approach to investing, with the level of volatility your pension is exposed to decreasing as you near retirement age. However, you may decide you want your funds to be invested in a higher risk fund if you still have many years before reaching retirement. Having a look at the different funds available with your provider is the first step in selecting which one is right for you.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which is subject to change in the future.

Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits and is not suitable for everyone. You should seek advice to understand your options at retirement.

Foster Denovo Limited is authorised and regulated by the Financial Conduct Authority

All statistics quoted have been taken from our whitepaper, ‘Planning for a brighter tomorrow: the state of the nation’s retirement finances.’

To download our whitepaper, click here.