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State pensioners across the UK face a major cut to their pension savings if they make one mistake.
When stashing away money for your retirement, it’s best to start saving as early as possible to give yourself longer to build up a decent cash pot to allow you to retire when you want to. Your retirement nest egg will also have longer to accrue interest over time, helping you to add some easy extra money to your pot. Paying voluntary National Insurance contributions is also well worth doing to plug any missing years in your National Insurance record, or you could opt to delay your pension to give yourself time to add to your savings. But there is one other easy way to add to your pension that you might not realise.
According to research by the Institute and Faculty of Actuaries (IFoA), people who don’t take advantage of extra employer contributions risk losing thousands of pounds from their pension savings – a mistake that can cost you up to £100,000.
The Pensions Act 2008 states that every employer in the UK must put certain staff into a workplace pension scheme and contribute towards it in a process called ‘automatic enrolment’.
Employers that have at least one member of staff have certain legal duties and must pay at least 3% of their employee’s ‘qualifying earnings’ into their staff’s pension scheme. Under most schemes this is normally earnings between £6,240 and £50,270 a year before tax. Total earnings include:
- salary or wages
- bonuses and commission
- overtime
- statutory sick pay
- statutory maternity, paternity or adoption pay
Employers must then deduct contributions from their staff’s pay each month to put into their pension pot. Most employers will allow staff to increase their contributions above the minimum 3% and may offer the option to ‘match’ the extra money staff put in up to a certain limit, meaning you can easily benefit from a bigger boost to your savings. Employees are advised to speak to their HR department or pension provider to see what extra contributions are available.
The IFoA said: “For a typical person, not taking advantage of extra contributions of 1% of their salary for 40 years could result in up to £100k loss.”
It adds: “For an individual it is very easy to forget, or delay thinking about pensions and sometimes that is the best thing to do. The strength of auto-enrolment and default investment strategies is that they are designed to help a pension pot build up without any action. However, there will be a few key moments in an individual’s life when mistakes can leave them with far less pension than they may ultimately need.
“It is important to recognise that individuals’ decisions about pensions do not occur in a vacuum. The choice for many relying on auto-enrolment is not between “do I pay more into my pension or not”, but between “do I pay into my pension or save for a house deposit” or “do I pay more into my pension or meet my current household needs or debt or pay off my student loans”. This becomes a more complicated picture when we consider life circumstances such as age, location and marital status, and other associated costs like the cost of health, childcare and social care.
“The IFoA wants to encourage individuals to prioritise their pension where they can and illustrate how decision-making over the shorter-term can have a drastic impact on final pension amounts over the longer-term.
