Auto Enrolment Pensions

With auto enrolment in to a pension scheme now being available for most employees in the UK I thought it was time we looked at what this potential pot of money could become and will it give you enough money to live in retirement.

The UK scheme initially had a minimum contribution rate of 2% this was shared between the employer and employee at 1% each this was effective until April 2018. From April 2018 – April 2019 the minimum contribution rate is 5% with 2% from the employer and 3% from the employee. From April 2019 the final increase will take the minimum contribution rate to 8% with an employer contribution of 3% and an employee contribution of 5%.

Let’s now look at how these figures will give you a pension pot based on starting at 20 until you are 65 years of age based on beginning to contribute from April 2017 based on earning the average wage of £26150 increasing ever year by 2% with a growth rate of your pension at 10%. After saving over these year you could end up with a pension pot of approximately £1.6-1.8m.
This amount of money sounds a lot in today’s money but you do need to remember that your average wage would have increase from £26,150 to £63,764. This means that your pension pot is worth about 29 times your salary at 65. This example does use quite a good growth rate over the 45 years so now let’s look at a slightly different growth rate.

Now let’s look at how these figures will give you a pension pot based on starting at 20 until you are 65 years of age based on beginning to contribute from April 2017 based on earning the average wage of £26150 increasing ever year by 2% with a growth rate of your pension at 6%. After saving over these year you could end up with a pension pot of approximately £562k – £601k.
This again sound like a substantial amount of money but again your end salary would have increase to £63,764. With this example your pension pot is now only worth about 9 times your salary at 65.

Will either of these be enough to live a good retirement would be anyone’s guess? It really would depend upon what you would like to do in your retirement, but it does give you an idea of the amount of money that can be earned if you invest in your retirement over the long term even using the UK government’s minimum standard pension scheme.

In another article we will look at what would happen to this pension if you delayed starting investing and did not auto-enrol until you were older.

The other things to consider is that your pension scheme may charge some fees that may also affect the amount of return you can achieve form your pension pot and you need to make sure that whatever is put into your pension is invested in a good asset class that has a long history of long term growth.

One other thing to remember is that in the UK there is a life time limit on how much you can save into you pension so you will also need to make sure that you do not over invest into your pension scheme as you may need to pay taxes on any amount over this due to the lifetime limit.

Although the above is mainly for the UK there a similar pension schemes available across the world in all the different countries, so the above examples are useful for everyone.

It is important that we all try and save as much as possible for retirement and a pension pot is just one of the way to do this. There are lots of other ways such as investing in property, tax free savings in stocks and share or a business. We will try and make some more posts on these in the future.

Please leave a comment or let me know how you are planning to save for your retirement or if you are even planning on saving for retirement or are you planning to survive off your local countries social security benifits. People are saying that we are heading for a retirement crisis with people not save enough money into there pension pots again we will have to wait an see.

The Normal Person

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