Pension contributions: Increasing savings by one percent could boost pot by 25 percent | Personal Finance | Finance


Retirement will seem a long way off for most people who are paying into a pension. However, for those who only entered the world of work in the past decade, time could pay in a big way.

According to WEALTH at work, a specialist provider of financial education, guidance and advice, saving an extra one percent of salary into a pension could increase a pension pot by 25 percent.

Jonathan Watts-Lay, Director, WEALTH at work, commented: “We speak to many young people at our financial education seminars and of course, a pension is not something they feel they need to worry about at their age.

“However, when we point out the difference saving more in their 20s can make, compared to starting in their 30s or 40s, especially if their employer will match any additional contributions, suddenly saving an extra one percent seems like a really good idea.”

WEALTH at work has created some examples to show that for people who are in their 20s, by saving an extra one percent a year with their employer matching this, it is possible to increase their pension pot in retirement by 25 percent.

They cover examples for basic rate taxpayers, as well as an example of how it would work for a higher rate taxpayer.

Example 1: Paul, 25 – basic rate taxpayer earning £20,000 per year

“Paul plans to retire at his state pension age of 68.

“At the moment he pays five percent of his salary into a pension, and his employer pays three percent through auto enrolment.

“It is estimated that his pension pot value at age 68 will be £99,341.

“If he and his employer were to increase their contributions by one percent (£200) each, an extra £400 per year would be going into the pension.

“However, his outlay is only £136 due to the pension contribution being taken before tax and National Insurance are deducted.

“The total pension contribution is now 10 percent, and the pension pot value is estimated to increase to £124,177 – an increase of £24,836.

“This is a 25 percent increase of the original pot.”

Example 2: Trisha, 25 – basic rate taxpayer earning £40,000 per year

“Trisha plans to retire at 68, and pays five percent of her salary into a pension, and her employer pays three percent.

“It is estimated that her pension pot value at age 68 will be £198,683.

“If she and her employer pay an extra one percent (£400) each, an extra £800 per year would be going into her pension.

“However, her outlay is only £272 due to the pension contribution being taken before tax and National Insurance are deducted.

“The total pension contribution is now 10 percent, and the pension pot value is estimated to increase to £248,353 – an increase of £49,670.

“Again this is an increase of 25 percent on the original pot.

Example 3: Kate, 25, higher rate taxpayer earning £55,000 per year

“Kate plans to retire at 68, and pays five percent of her salary into a pension, and her employer pays three percent.

“It is estimated that her pension pot value at age 68 will be £273,189.

“If she and her employer pay an extra one percent (£550) each, an extra £1,100 per year would be going into her pension.

“However, Kate’s outlay is only £319 due to the pension contribution being taken before tax and National Insurance are deducted.

“The total pension contribution is now 10 percent, and the pension pot value is estimated to increase to £341,486 – an increase of £68,297.

“Again this is an increase of 25 percent on the original pot,” WEALTH at work said.

Mr Watts-Lay continued: “As these examples show, it is possible, if your employer is willing to match extra pension contributions, to turn an additional saving of £136 into £400.

“Most people of all ages would benefit from saving more for their retirement.

“Many companies offer their employees’ financial education to help them understand their finances and saving options, so individuals should speak to them to ask what’s available.”





Source link

Comments are closed, but trackbacks and pingbacks are open.