Staff who save for retirement from their 20s onwards could be very significantly better off in later life than those who delay paying into their pension until they reach 30.
Pension auto-enrolment contributions increased to 8% of earnings from 6 April 2019, with a minimum of 3% contributed by employers and 5% from employees.
The increase means that someone on the UK’s 2018 average salary of around £29,500* could now be savings upwards of £2,300 a year for their retirement, compared to just £590 in 2017 when minimum contributions were a total of 2% of earnings. Over the course of a working life, those contributions – with the added advantages of tax relief and investment returns – will add up to tens of thousands of pounds.
But it might be tempting for younger workers, with more immediate financial pressures, to put off starting to save for a pension. However, the long-term cost of delaying really adds up.
Investment platform Interactive Investor has calculated that someone with a starting salary of £20,000 at age 20 increasing by 1 per cent each year until retirement at 67, who achieves an annual return of 3% on their pension savings, could lose out on over £71,000 if they put off saving into a pension by just 10 years.
What does it mean for business?
Two increases in minimum pension contributions in two years means younger employees may want to know why they need to save for retirement right now. They could be facing day-to-day pressures to make ends meet, while being encouraged to put away money they probably won’t see again until their mid-sixties.
Everyone’s circumstances and priorities are different. Putting long-term savings in context alongside short and medium-term financial goals can help employees see how retirement fits into the bigger picture of their financial wellbeing. And not saving into a workplace pension means missing out on ‘free money’, in the form of the employer’s 3 per cent contribution plus the associated tax relief.
At Brunsdon we specialise in employee benefits communication and workplace financial education. So talk to your Brunsdon adviser for ideas about how to get younger workers on board with pensions, as well as helping them with other financial essentials, such as budgeting and getting into a savings habit.
*calculated as 52 x weekly median earnings of £569
Please note that this article does not constitute specific personal advice. Any information in this article regarding tax treatment is based on our understanding of current UK tax law and HM Revenue and Customs practice, all of which may be subject to change.Brunsdon is not responsible for the content of third-party web sites.