Saving for retirement is essential for individuals who want the financial freedom to enjoy their later years and getting into the savings habit early can help them achieve that. Yet many individuals are unsure about the options available to them leading up to retirement, as well as how best to go about saving a suitable amount to allow them to continue a comfortable lifestyle after retirement.
Not only will placing money into a pension each month provide an indication as to when retirement could become viable, it will give peace of mind that a financially secure retirement can be achieved. This is a major concern for many, as disclosed in our report, Click here to view.
According to a study by Scottish Widows, 61% of 3,535 respondents are confident of having enough money to fund a comfortable retirement. However, for those that fall into the 39% minority, the easiest way to boost their retirement income is to seek expert advice early and plan a savings strategy to ensure the taxman isn’t taking more than his fair share.
Where do our employees start?
Auto-enrolment offers a solid base to build on for most workers earning at least £10,000 a year and between 22 and state pension age but a person’s savings habit shouldn’t end there.
Eligible workers put 3% of their salary into their workplace pension in 2018/19, while you as their employer would contribute 2% to bring the total to 5, unless they have more beneficial arrangements in place.
It is worth noting that employees will also have national insurance contributions (NICs) deducted from their pay packet through PAYE. These contribute towards their state pension entitlement, with 35 years of NICs needed to qualify for the full new state pension of £164.35 a week.
With the state pension unlikely to be enough to fund a comfortable retirement after individuals have stopped working, a personal pension could be considered.
How much should our employees save?
Where possible, you should encourage employees to save as much as they can afford to, within their contribution limits, as the earlier they start saving the less they will need to put in each month. Research from Scottish Widows suggests a 25-year-old should be putting £293 a month into their pension pot to collect an annual retirement income of £23,000.
If they put off saving until they’re 35, those individuals will need to save £443 a month, while at 45 this monthly figure jumps to £724. Someone who has left their retirement saving until they were 55 would need to contribute £1,445 a month towards their pension to achieve the same annual retirement income.
Ultimately, if an employee has a lower retirement income target in mind they will not need to save as much as the report suggests and if they start saving early they will pay even less towards their target.
What are tax-efficient ways to save?
Most people can contribute up to £40,000 a year into their combined pension pot without paying tax, although they will pay tax when they take an income from it in retirement (other than any tax-free cash allowed).
This annual allowance combines the value of all the pensions inside their pot, such as any workplace pensions and any personal pensions. If a person exceeds the threshold, or 100% of their earnings if lower, they will be liable for tax.
For higher earners – those earning more than £150,000 from all types of income plus any employer pension contributions – the allowance is tapered by £1 for every £2 above £150,000, up to a maximum reduction of £30,000.
This means the allowance is capped at £10,000 for anyone earning more than £210,000.
Most pension providers give 20% tax relief, although it’s possible to receive tax relief at the marginal rate of income tax on pension contributions in 2018/19. This makes the cost of contributing the same amount into a pension cheaper for people in the highest tax brackets. For instance, if an individual put £8,000 into their pension in 2018/19 and the government adds £2,000. A higher rate (40%) taxpayer can then claim an extra £2,000 in tax relief through their tax return, making the total cost of a £10,000 contribution £6,000.
The same contribution would cost an additional rate (45%) taxpayer £5,500.
Different tax bands and rates apply to taxpayers in Scotland, which means the tax relief available will be slightly different.
The lifetime allowance, which stands at £1.03 million in 2018/19, allows persons to save into a pension without triggering an excess tax charge at retirement. Anyone who exceeds this lifetime limit will be liable for an additional 25% tax on the excess if the money’s withdrawn as income or 55% if the money’s taken as a cash lump sum.
Taking advantage of ISA allowances (£20,000 in 2018/19) is another strategy that enables people to save using a combination of ISAs, and potentially benefit from government top-ups.
Cash ISAs, which have offered savers lower returns due to prolonged spells of low interest rates, and stocks and shares ISAs are the two most popular options.
The Lifetime ISA enables savers aged between 18-39 to put away up to £4,000 a year, with the government contributing £1,000 so long as it is used to either buy a first home or for retirement, after age 60.
Is it worth topping up missed NICs?
Class 3 NICs can be made to fill in missing years in a person’s national insurance record that will count towards how much they’re entitled to receive from the state pension.
Whether or not it’s worth topping up missed contributions depends on the individual’s personal circumstances, and the first thing to do would be to check their NICs record at gov.uk/check-state-pension. That will tell them how many years are incomplete and inform them of how much they would need to pay. These top ups using voluntary class 3 NICs can be paid by cheque, online or over the phone. However, it is worth notifying your employees that they require 35 years in the new system to qualify for the full state pension.
HMRC will continue to accept top-ups, but this won’t increase an individual’s state pension if they have already got enough years to qualify for the full entitlement.
One of the biggest pension traps a person could fall into is simply not saving enough for a comfortable retirement. It’s easily done and saving something, no matter how small, is better than nothing.
Arguably the second biggest pension pitfall that could affect somebody is running out of savings if they happen to outlive the amount they have saved. This has the potential to be disastrous if, for example, they end up in a nursing home where the average weekly cost of care stands at £866.
In addition, new rules allow for individuals to withdraw their entire pension pot after the age of 55. The first 25% will be tax-free, but they will pay income tax on the rest.
For those with larger pension funds, these withdrawals, combined with their earnings, could push them into the next tax bracket, which may mean that they face a 40% or 45% tax bill.
If you are having difficulty providing financial education and at-retirement support within your organisation or are looking to outsource the facilitation and delivery of these amenities, there are a range of services we can provide to assist. Lucas Fettes Financial Planning appreciate that providing Financial Education can be costly and resource intensive, hence we provide the following cost-effective initial services:
- group level presentations
- individual 1-to-1 discussions
We would be happy to help should you require more information, please contact our team by calling 0345 357 8910 or via email at firstname.lastname@example.org.