‘Most effective piece of advice’ when it comes to pension saving

Pension: Expert discusses state pension tax

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Saving for retirement may be something that many people turn a blind eye to until they get nearer to the end of their working life, but taking the right steps early on can make a world of difference further down the line. With that in mind, Robert Cochran from Scottish Widows has provided some key advice for those looking to boost their pension savings in order to get the most out of retirement.

He said: “The most effective piece of advice is to start saving into a pension as soon as you can afford to – pensions aren’t just for older people. Scottish Widows has a very simple Cost of Delay Calculator that brings to life the value of saving early.

“While it would be great if there was a one-size-fits-all approach to pensions, unfortunately, there is no exact formula for how much people should be saving for retirement. Everyone’s lifestyle and expectations are different and contribution levels will vary based on income, aspirations, life circumstances, age and investment returns.

“That said, we can offer a guide. For a worker on average earnings, we suggest a minimum savings rate of 12 percent (including employer and employee contributions) to help them reach an adequate retirement. For those looking for something more comfortable, we’d advise increasing to a 15 percent savings rate.

The auto-enrolment scheme was introduced in 2012 and has allowed millions of working Britons to easily contribute to their pension pot, by making it a requirement for all eligible employees to be enrolled in their workplace pension scheme.

This has had a positive impact on the retirement savings of the UK’s workforce, and has also raised awareness about the benefits and importance of making the effort to contribute regularly to a pension in order to enjoy a comfortable retirement in years to come.

However, concerns have been raised that auto-enrolment is not enough on its own, with Britons still needing to make other contributions to private pensions to ensure that they have enough income when they finish work. Mr Cochran encouraged Britons to start making pension contributions early to help bridge the gap.

He said: “If you were to make the same level of pension payments each year you could receive a pension that is 29 percent higher if you start contributing at the age of 25 versus 30 and an unbelievable 69 percent higher if you start at 25 versus 35. The earlier you can start paying into your retirement fund the longer your money has to grow.”

While pensioners in the UK are entitled to a state pension, recent data has suggested that this alone is not enough to sustain a comfortable retirement, with savers needing to take responsibility for topping up their pension to an adequate level.

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It has been reported that the average pensioner will exhaust their yearly state pension months before the end of the year. The average retired couple will have run out of money by the end of August, while single pensioners would have burned through their state pension by September 3.

The full state pension is £179.60 per week, which adds up to £9,339.20, while the full basic state pension is valued at £137.60 a week, meaning a yearly income of £7,155.20 for pensioners.

The need to plan for retirement and take steps to boost one’s pension has been brought into sharp focus by the news of the state pension triple lock being scrapped for the 2022/23 tax year. This change highlights the uncertainty that may lie ahead with regard to state pension.

The triple lock is a guarantee that the value of state pension will be increased each year by the highest of three figures, which are 2.5 percent, the rate of inflation, or average earnings growth. However, the Government announced that the triple lock will not be honoured next year.

This is due to the fact that average earnings growth is abnormally high due to economic factors as a result of the COVID-19 pandemic. Pensioners had been set for an increase of more than eight percent had the triple lock been deployed as normal.

The Government will ignore the average earnings growth element of the triple lock, meaning that it essentially becomes a ‘double lock’ for next year, which they have said is a purely temporary measure. Therefore, the value of state pension will increase by the higher of 2.5 percent or the rate of inflation next year.

It appears that inflation will come in at a higher number than 2.5 percent, with the all-important figure to be announced in October. Inflation shot up to 3.2 percent for the year to August 2021, having been at two percent the previous month.

The 2.5 percent inflation rate for the year to June was a three-year high, but that has now been smashed by the August figure, and the jump between two percent in July and 3.2 percent in August is the highest on record.

Mr Cochran also commented on the difficulties that women experience in terms of a pension gap, leaving them with less retirement savings than men in many cases.

He said: “Just as there’s a well-known gender pay gap, this becomes the pension gap in later life. Our research shows that over the first 15 years of a woman’s career, women on average save about £2,200 a year, compared to £3,300 for men. Added to lower salaries, women’s savings are held back because they are more likely to take time out of work to raise a family or care for loved ones.

“However, there are things women can do to help achieve a comfortable retirement. If the average woman were to up her contributions by 4 percent at the start of her career, at 68 the pension gap would decrease from £100,000 to £25,000. Upping contributions by 5 percent would almost reduce the gap completely to just £6,000.”

The campaign group Women Against State Pension Inequality (WASPI) have played a big role in bringing to attention issues that women have faced with regard to pension inequality, as they claim changes to the state pension age for women were not effectively communicated, leaving many women with little time to make alternative arrangements.

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