the workplace pension

If you don't have one, get one.

Okay, okay! It's not just as simple as that! I don't mean to go into the 'why it's important' patrony, that much is obvious. The bottom line really is that, once your immediate needs are met, it's imperative that you do start investing for your future. The trouble is, private pensions aren't as accessible as they could be.

You are only eligible for a private pension in the UK if you are aged between 22 and the state pension age (currently 65), earn at least £10,000 per annum and have a permanent place of employment in the UK.

From personal experience, the first problem is the age limit. Since September 2014, I've been working full-time at a respectable, mid-market managed IT services provider in Glasgow. Fresh out of high school, bright eyed and bushy-tailed, I went from being one of the most skint kids of my social circles, to one of the more affluent ones. Not a flex, just a fact! For that first year of my professional career I had more money than I knew what to do with, which made it the best time in my life that I could have enrolled to a pension plan - but I was too young. It would be five long years before the opportunity would even open up to me, meaning I missed out on roughly £9,800 in contributions. In the grand scheme of things this isn't much, but it would have been a welcomed leg-up. Having never factored this into my budget, suddenly having to find £60 per month that I could afford to loose was a struggle at first, a worry even. And now I was living independently, I wasn't even sure I could afford to loose that much every month. Whereas had I always been contributing since day one at age 17, I wouldn't have even noticed the monthly deductions by the time I was 22.

I'm sure the argument would be that it's not typically on young people's immediate agenda to start a pension, which is a total cop-out excuse. I'm under no illusion that this is probably the case for many young workers, but that doesn't give anyone scope to ignore the minority who don't conform to this stereotype. Not everyone turns 18 and spends the first 10 years of their adult lives misappropriating the meaning of YOLO. So who are we to preclude these young, goal-driven and career-focused individuals from reaching their retirement goals as early as possible? We wouldn't stand for such discrimination in any other setting, so retirement should be no different. And after all, as I've said before, to maximise your compounding interest, the earlier you start investing, the better off you will be.

Then there's the role your income has to play on your eligibility. There are marginalised, overlooked members of our society who have never (and possibly will never) earn £10,000 or more. It's the workers we take for granted in our every day lives, yet regardless help keep the country going - cleaners, hairdressers, labourers, fast food staff, school cooks, school crossing patrollers, holiday reps, lifeguards, film runners, small business owners - even hospital porters depending on their hours. These are the workers who may love their job but likely struggle to simply make ends meet. They are the workers that we will all depend on at some stage of our lives, yet the millionaire mugs of Whitehall have decided that they don't deserve the access to such a crucial retirement savings option, one that maximises your deposits by mandating that your employer pays in too. Barring accident or illness, most of us will eventually reach retirement age, yet a comfortable retirement is not truly a right. It's a disgrace.

As a result, I've no doubt there are many out there who's retirement plan is to rely on the state pension alone. Perhaps some have worked this out in great detail and realised that their overheads are low enough to scrape past this ceiling. But regardless of how much planning went into this conclusion, the net result of "I'm going to live off state pension, period" is nonetheless problematic.

For a start, it's not a lot of money to live on. For the minority, as I say, it may just be enough to scrape by. In fact for those on the UK poverty line, state pension provides a welcomed relief of that bit more wiggle room in retirement. But for the rest of us, there would come a struggle.

Most people will need roughly 70% of their current income in retirement each year to live comfortably. So if we assume a John Doe earns £1,665* per month, he'll need £1,165 per month to retire and comfortably cover his overheads - and that's assuming he has no housing costs to factor in. Should he retire with a mortgage outstanding or with rent to cover, he'll struggle to manage even with 70% of his income. So really, the 45% offered by the state pension alone is vastly insufficient. 

So choosing to live on the state pension alone is at best a shock to the system and at worst bankruptcy waiting to happen. But that's just the half of it.

According to the Government's Actuary Department, the UK's state pension fund could "run dry by 2033." Basically, as a country we are taking out more from the pot than we are putting in, mostly down to the fact that people are living longer and longer. So I could reach 36 years old when the announcement is made that the Government will no longer be providing a state pension. As is usually the way with Government, it hasn't happened yet so there has been no rush to remediate the problem. But knowing there is scope for this happening, we should all be doing our best to plan for the worst just in case it does come to fruition. 

Understanding that not everybody qualifies for a workplace pension, and that not having one in retirement could spell disaster, is the perspective I think many really need to see. If you qualify for one but don't currently have one, you owe it to yourself to make sure that you sign up.

Once you do, a percentage of between 4% and 7% is deducted from your salary each month, and then your employer pays in too. The percentage your employer contributes will vary from the minimum of 3% to a maximum of 10% depending on company policy. You'll also receive 1% tax relief from the Government. Remember, there isn't a cash option for these contributions. So opting out of a workplace pension is as good as leaving money on the table. In other words, it's free money, make sure you take it!

As an example, as of this writing I pay in 4% of my salary, which works out at £90 per month. In the days before the workplace pension, that would have been my entire contribution. Assuming I paid this in every month between the ages of 22 and 65, assuming average returns, I'd have around £294,851 to retire on. When we use the 4% Rule, this would give me just under £11,800 per year in retirement. Even today, this isn't a lot of money to live on. But when we also remember that our pension pots need to our-pace inflation, that's when you really see how little this will be in 43 years time! 

But thankfully, times have changed. With the workplace pension scheme, my employer pays in 6% with the 1% tax relief added on top. So rather than £90 going into the pot each month, there's actually £247.50 going in. If I were to deposit this for 43 years, assuming the same average growth rate of 7%, the pot would be sitting around £810,842 and allow for an annual pension of £32,400. As you can see, it makes a big difference!

And that's not factoring in the scope for deposit increases over time. If you're lucky enough to have an annual performance review and merit increase at work (because remember, many don't get this), then factor this in too. For my example, if I assume an average increase of 5% per annum, it takes the pot up to a whopping £1,645,843, which nets an annual pension of £65,800. 

That's the literal life-changing difference a workplace pension can make to your retirement, provided you take the plunge at the earliest opportunity. The longer you leave it, the harder you need to work.

~ Aedan.

*based on Scotland's average pay of £24,486, assuming no pension contribution is made.