Some 35 years ago 8.1 million workers saved in to a company pension. Today just 2.9 million people do. And gold-plated final salary pensions are also dying out. In 1997, one in three of us had a final salary pension, today it is one in ten.
We are all also living longer on average. Thanks to healthier lifestyles and medical advances, today’s 65-year-olds are expected to live to 86 — six years more than someone who retired in 1967. All these combined have given Britain a savings crisis.
The average pension fund is £26,000 — enough to give a married 65-year-old man an income of £1,298 a year. One answer to the problem is to get us to save for longer. So the Government is making sure most workers are given the chance to save in to a company pension.
A PENSION FOR 11M WHO AREN'T SAVING
From Monday, all employers, starting with giant companies such as Tesco and Sainsbury’s, will by law have to pay into a pension for their staff. Between then and Christmas, 800,000 will be enrolled, with smaller companies being gradually included over the next six years.
By October 2018, even the smallest employers — including families hiring a full-time nanny — will have to give their staff a pension. Eventually 11 million workers who have never had a pension before will start saving for the first time. Anyone aged over 22, earning at least £8,105 a year, and with three months’ service under their belt will qualify.
All workers will have to pay in to this pension. Their employer will also make a contribution, and so will the Government.
At first, a minimum of 80p for each £100 earned will be automatically taken from their wages every month. Companies will add £1 for every £100 of salary. And the government will add 20p — a refund of the income tax you would have paid on your contribution — giving a total of £2.
This means someone on £25,000 a year will see £28 paid into a pension each month. Their take-home pay — usually £1,417 a month after tax and National Insurance — will fall by £11.
At some companies, particularly those which already offer a pension to staff, contributions from workers and the company will be higher.
The minimum workers will have to save will rise in 2018: £4 for every £100 of salary, plus £3 from the company, and £1 from the government.
If a worker on £25,000 a year starts saving at this rate aged 30, they will have £244,122 by 65 (assuming annual 7 per cent growth and 1 per cent fees). This should provide an income of around £5,490 a year in today’s money, according to wealth manager Hargreaves Lansdown.
NO PENSION FOR 20 YEARS
This year, Andy Gibbons started saving into a company pension for the first time.
The 41-year-old has worked for window and door-fitting firm VBH for 20 years, but until January it didn’t offer a pension.
Then VBH signed up to test out Nest, the new national pension scheme — and the married father-of-three from Sutton Coldfield in the West Midlands jumped at the chance.
Mr Gibbons — pictured with wife Joanne, 41, and children Jake, 10, Ross, seven, and Mason, two — says: ‘I don’t want to be a burden on my kids when I retire, and my wife and I both want to travel the world.
‘I already had a small pension of my own, but the idea of my company contributing on my behalf made it an easy decision to join.’ VBH currently puts 1 pc of Mr Gibbons’ salary into his pension.
‘In future, when things improve for us financially, I hope to save more,’ Mr Gibbons says.
HOW TO AVOID A SHARE PRICE WOBBLE
The money taken from your pay, along with that added by your employer and the Government, will be invested. It will be put in to a pension fund that holds shares from different companies as well as other types of investments, such as bonds and gilts (these are essentially IOUs issued by big companies and governments which pay a regular income in exchange for borrowing your cash).
Most workers automatically enrolled will be put in to an existing company pension scheme. Around five million will have their money put in to the National Employment Savings Trust — Nest, for short. This is a newly created business that exists just to provide a simple investment plan for pension savers.
To those who have never invested before, it can seem daunting. But putting your money in a fund gives it a chance to grow quicker than in a bog-standard cash savings account.
In most company pensions you will be able to pick from a number of different funds. The 170-plus companies which have signed up to Nest so far will offer six funds. By default most will go into something called a ‘target-date’ fund.
Here, you say when you think you will retire — your ‘target date’ —and the risk you take is adjusted depending you age. Those in their 20s will be invested in very low-risk investments for the first five years. This is to give them a feeling of safety.
Then, along with anyone 30 and over, they will go into a more adventurous fund designed to grow faster. When you are ten years from retirement, the fund will go back to very cautious investments to protect your profits.
At any time you can choose to invest in five other funds, each designed to grow at different paces. Low-risk funds are designed to pootle along methodically and are less likely to collapse if stock markets wobble.
High-risk funds have potential to sky-rocket rapidly and make you a huge profit. However, they are more likely to nosedive if the economy turns sour.
If a 30-year-old saved £50 a month for 35 years and the fund grew at 4 per cent a year after charges — a fairly average rate in the investing world — the pot would be worth £45,839 by age 65.
If the fund grew at 7 per cent a year, the same saver would be sitting on £90,578, according to figures from advisers AWD Chase de Vere.
One reason why you shouldn’t worry so much about risky funds when you are younger is because you will be saving regularly in to it. This means that when the price rises you’ll be buying slightly less of the fund, but when it falls you’ll buy lots more.
So, when the fund climbs again you’ll get a lot more profit. Whichever you choose it pays to keep a close eye on your money.
I'LL START SAVING NOW
Gemma Anders is one of millions of young workers who will be signed up to a company pension in the next six years.
The 24-year-old (left) is in her first senior role at fashionable High Street clothes store Karen Millen after winning a place on the firm’s graduate trainee scheme a year ago.
Ms Anders, originally from Launceston in Cornwall but now manager of the Karen Millen store in Selfridges Birmingham, says: ‘The company made it very clear that a pension was a good idea, but at the time it was something I thought I could do without.’
Now her career is in full swing, she is open to saving some of her salary into a pension, but admits automatic enrolment is the nudge she needs.
CASHING IN YOUR YEARS OF PROFIT
Money in a pension is locked away until you reach the age of 55 at the earliest. This is to make sure you use it for retirement rather than a holiday or new car. When you retire, you’ll be able to take a quarter of the pension as a tax-free lump sum. The rest you will need to convert into a regular income.
In most cases, this means buying something called an annuity from an insurance company. Today, a pension pot worth £100,000 will buy a married man aged 65 an income of £411 a month or £4,935 a year from an annuity, according to advisers at Better Retirement Annuity group.
THE FEES THAT CAN REDUCE YOUR POT
Pensions aren’t free. So every year a small amount of the profit you make will be taken as an annual charge for investing your money. The pension fund or Nest will deduct this. A typical fund has an annual charge of 0.77 per cent.
Nest has a 1.8 per cent up-front charge. This means only £98.20 of every £100 you save actually makes its way in to the fund. The rest goes to help pay the costs of running Nest. On top of this, it takes 30p a year on every £100 you have invested as an annual charge.
There are alternatives to Nest, but your employer will choose which scheme it invests in.
The People’s Pension has no initial charge, but takes 50p a year on every £100 saved as an annual management charge. Now: Pensions, which is another rival, charges 30p a year on each £100 plus a £1.50 a month flat-rate administration fee.
AN OFFER YOU SHOULD NOT REFUSE
Although you will be automatically signed up to this pension, all employees can opt out. But don’t do it simply because you think you can’t afford it. Once the money starts coming out, you’ll barely notice.
If you do opt out, you’ll be turning down free money from your company and the Government — it’s money you’re legally entitled to. It’s tempting, particularly for younger workers, to think that they can delay saving — after all, retirement is likely to be more than 30 years away. But an extra five years can make all the difference.
Someone on £30,000 who starts saving into Nest aged 30 can expect a retirement income of £6,900 in today’s money per annum if their investment grows at 7 per cent a year. Delaying just five years will get £5,230 with the same rate of growth. Delay another five years and the worker can expect just £3,860.
John Lawson, head of pensions at Standard Life, says: ‘If you think the Government will look after you in your old age, you are taking a big risk.
‘The strain on government budgets will only grow as the population ages, so your first step to taking care of retirement should be making sure you don’t opt out of a company pension scheme once signed up.’
Only savers in their late 50s or 60s, close to retirement, and who already have a large nest egg can justify refusing to save. If you opt out, you will be automatically enrolled again in three years’ time — or after three months at a new company. And if you already save into a work pension, then you will continue saving as before.
SJ POST 