THERE are times when many savers run out of steam.
Then they often ask for a hand with the heavy lifting. That’s where financial advice comes in.
This is one of those times: financial turmoil, runaway inflation, spiralling cost of living.
As a result, one recent survey concluded that many workers are pausing their pension contributions: the research found that 9 per cent have already stopped, and a further 8 per cent are planning to stop in the next year.
This can have serious consequences. The pensions company Aegon say that an average-earning 25 year old who stops contributing for a year will have £4,600 less at retirement age.
Bear in mind that taking time out from pension savings means you miss out on ‘free money’ in the form of tax relief and employer contributions.
Even those who do continue to save are not saving enough: experts such as Scottish Widows recommend paying in 12 per cent of your salary each month, but most workplace pensions allow just 8 per cent, including your employer’s contribution.
This has set alarm bells ringing at the Association of British Insurers, who are calling for the 12 per cent minimum to be phased in over the next decade.
Combine this with the decline in generous final salary pensions, which give a great guarantee of what you will receive when you retire: many are now closed to new members. Instead, most of us are now in defined contribution (DC) schemes, where you know what you’re paying in, but have no guarantee of what you’ll get back. In other words, the risks in the DC model rest with the employee.
Now, it’s not all been bad news in the past decade. The introduction of auto-enrolment in 2012 meant that, instead of having to opt into your workplace scheme, you are automatically put in, with the option to opt back out.
Now, for employees aged at least 22 and earning at least £10,000 a year, our tendency towards ‘pensions inertia’ has been turned on its head: we have to take action to opt out, rather than opt in. The Office for National Statistics says that eight out of 10 workers stay in their scheme. As a result, the number of DC members rocketed from just 2.4 million in 2013 to 25.3 million by 2021.
However, self-employed workers are still not provided for, as auto-enrolment doesn’t apply to them, and the same goes for all workers aged 18-21.
Younger workers are also more mobile in the labour market these days. They’ll have on average 11 jobs in their lives, that’s up to 11 small pensions to keep track of – clearly a huge challenge. Plans are under way for a ‘pensions dashboard’ where you can see all your pensions in one place, but that won’t be ready until 2024.
The industry is strongly recommending that pension savers take advice to make sure their pensions are on track to keep them comfortable in retirement.
That’s where we come in. It’s particularly important to understand that your pension savings are invested in the stock markets, which quite normally show a degree of volatility. And if you are one of those planning to put your contributions on hold, as you struggle to keep up with the cost of living, it is crucial to get advice on how that will affect your retirement outcomes.
Need some help with the heavy lifting to shore up your finances?
We’re just a phone call away.
:: Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 71886005. Further information on Facebook at Kennedy Independent Financial Advice or at www.mkennedyfinancial.com
