What the changes to pensions mean for you, and how to save for a comfortable retirement
With new regulations, the ins and outs of building a nest egg may seem more daunting to navigate than ever, but Vicky Shaw says a little planning can go a very long way
April's pay packets may be looking a bit lighter for some people, because new rules have come into force meaning more cash is funnelled into workplace pensions.
Minimum contribution rates for workplace pensions were increased on April 6, meaning those who only pay in the minimum amounts will notice more of a difference.
The changes are happening under automatic enrolment - the pensions revolution that was introduced in 2012 to encourage a greater retirement savings culture.
Here's a look at what the increases mean and how you could grow your pension pot for a comfortable retirement.
Minimum contribution rates into workplace pensions are gradually being stepped up, to help nudge people towards saving more for their retirement.
Contributions are made up of money from staff, their employers and the taxman, through tax relief. Previously, the minimum rate was a combined 2%. Now it's 5%. In April 2019, the rate steps up to 8%.
Will this be enough to live the kind of lifestyle I want in retirement?
While everyone's circumstances and ideas about retirement are different, if you're just saving the absolute minimum, this may be unlikely.
Alistair McQueen, head of savings and retirement at Aviva, says that while the minimum is a "solid foundation", a 22-year-old saving the minimum throughout their working life could end up with the equivalent of less than half their salary to live on in retirement.
As a very general rule of thumb, someone aiming for a comfortable retirement, which doesn't mean a drop in living standards, may want to aim for the equivalent of around two-thirds of their salary in retirement, he suggests.
So how can I go about it?
A 22-year-old at the start of their working life may want to consider putting 12% of their salary into their workplace pension to achieve the goal of a comfortable retirement. "That can be a scary number," McQueen says, "but that 12% includes your money, money from the employer and tax relief."
Another simple way to think about it could be to put £5 away per day, based on a 22-year-old on an average salary, which could help someone of this age on their way to hitting their target retirement savings level.
For those who are older who have not saved into a pension previously, saving a salary percentage which equates to around half their age could help them towards a more comfortable retirement, McQueen says.
For example, a 40-year-old may want to save 20%, and a 50-year-old 25% - although again, this includes money from the employer and tax relief, as well as the employee.
Workers may also want to try and make sure they have at least 10 times their salary in their pension pot for a comfortable retirement.
So, for example, someone on £25,000 may want to make sure they have built up £250,000 for example.
While this may also seem like a daunting sum, McQueen says investment growth over time can really help boost the size of a pension pot.
"The sooner you start saving, the sooner you benefit from interest and investment returns," he adds.
What if I'm thinking of opting out of my workplace pension?
While opting out is an option, McQueen says those who opt out are "turning their back on free money". Pensions are flexible ways to save, and it's possible to vary the amount you put in, depending on how your personal circumstances change.
What if I want to find out more about my pension?
A good starting point is to take some time to go through your annual pension statement, McQueen says. Many pension companies also have online tools and apps nowadays which can help. You can also speak to your pension company for further guidance. Some people may also want to pay for advice about their finances from a regulated financial adviser.
Where can I go to get further information?
Employers can help, but if they don't know the answer to a question about your finances, there are also plenty of places that offer free and impartial advice.
The Money Advice Service (moneyadviceservice.org.uk; 0800 138 7777) offers free and impartial guidance, and the Pensions Advisory Service (pensionsadvisoryservice.org.uk; 0800 011 3797) also provides free, impartial information about pensions.
For those aged over 50, the Pension Wise service (pensionwise.gov.uk; 0800 138 3944) may be able to help make the options available clearer.