Introduction
When it comes to retirement, many people assume that their workplace pension will be enough to see them through their golden years. After all, auto-enrolment means regular contributions are made directly from their salary, and employers often match contributions. But is this really enough to provide the comfortable lifestyle many envision in retirement?
The reality is that for most people, a workplace pension alone is unlikely to be sufficient. While workplace pensions are an excellent starting point, they may not provide enough to fund your desired retirement lifestyle. In this article, Steve Rowe Chartered Financial Planner explores whether your workplace pension is enough to retire on, compare it to personal pensions, and discuss how you can make the most of your retirement savings to ensure you have enough to enjoy your retirement years.
Is a Workplace Pension Enough to Retire On?
In the UK, workplace pensions are typically based on auto-enrolment, where both you and your employer contribute a set percentage of your salary to a pension pot. While this system is certainly an improvement on the past and ensures that more people are saving for retirement, it still doesn’t always add up to a comfortable income in later life.
The amount of money you’ll have in your workplace pension when you retire depends on several factors:
- Your contribution level
- Your employer’s contribution level
- The performance of the pension funds
- The age at which you start contributing
- The length of time you stay in the same job
Many workplace pensions operate on a “defined contribution” basis, which means the amount you receive in retirement is based on how much you and your employer contribute and how well the investments grow. The challenge here is that the amount most people contribute (especially at the minimum rate) is often not enough to provide the retirement income they need, particularly if they have high retirement goals.
To learn more about what a pension is and how it works click here.
"Let’s say in 35-40 years of work, you are trying to fund a typical retirement length of 30 years, a contribution of 8% of your salary isn’t going to fund that. It’s true compound interest is the 8th Wonder of the World (Albert Einstein) but it will not perform miracles."
What Happens to My Workplace Pension When I Retire?
Once you reach retirement age, the process of accessing your workplace pension will vary depending on the scheme you are enrolled in. Typically, there are a few options available:
- Lump Sum Withdrawal: You can take part or all of your pension pot as a lump sum. The first 25% of this is tax-free, but the rest will be taxed as income.
- Income Drawdown: With this option, you keep your pension invested and withdraw money as you need it. This option allows flexibility but also carries the risk of running out of money if you take too much too soon.
- Annuities: This is a more traditional option, where you convert your pension pot into a guaranteed income for life. While this provides security, it may not be the best option for those who want more flexibility or have a long life expectancy.
While these options sound straightforward, it’s crucial to understand how much you’ll need to live comfortably and how to make your pension last through retirement. Many people are surprised to discover that their workplace pension won’t provide the income they expected, especially when considering inflation and rising living costs.
A Handy Ready Reckoner:
Take how much you need to live on in retirement: Say £3,000 a month / £36,000 a year
Subtract State Pension / Defined Benefit pensions: Say £12,000
Total - £24,000
Take this and divide by 5% - in our example £24,000 / 5% = £480,000
So to get you the retirement income you want, you need a pot of around £480k by the time you want to retire (there are lots of variables, this is just quick maths!)
Is a Workplace Pension Better Than a Private Pension?
So, is a workplace pension enough, or would you be better off with a private pension? The answer isn’t straightforward—both types of pensions have their advantages and disadvantages.
Workplace Pensions
These are often easy to set up and come with the benefit of employer contributions. However, they can be limited in terms of flexibility, and the amount you can contribute may be capped. Additionally, the fund performance may not always align with your personal risk tolerance or investment goals. They are designed to be lower cost and give easy access to staff with minimal headaches for the HR department. You should always maximise the employer payment in by paying as much as they require to get their full contribution.
Private Pensions
Private pensions (or personal pensions) offer greater flexibility. You can choose how much you contribute, and you have more control over the investment options. This can be particularly useful if you want to tailor your pension to your specific retirement goals. However, private pensions don’t benefit from employer contributions, and you may need to pay higher fees depending on the plan.
In many cases, having both a workplace pension and a private pension can provide the best of both worlds: the steady contributions from your employer combined with the flexibility and growth potential of a personal pension.
Can I Have a Private Pension at the Same Time as a Workplace Pension?
Yes, you absolutely can have both a workplace pension and a private pension at the same time. In fact, it can be a very smart strategy. While your workplace pension provides a reliable source of retirement savings, a private pension offers more flexibility in terms of contributions and investment options.
Having both types of pensions allows you to maximise your contributions and diversify your investment strategy. Plus, contributing to a private pension while still receiving employer contributions to your workplace pension can give you a larger overall retirement pot, especially if you start contributing to a private pension earlier in your career.
Desired Retirement Lifestyle
A crucial factor in determining whether a workplace pension is enough to retire on is your desired retirement lifestyle. Do you envision a modest retirement where you simply live comfortably without much extravagance? Or do you have a more luxurious retirement in mind, perhaps with travel, hobbies, and regular dining out?
The lifestyle you want in retirement directly impacts how much money you’ll need. A survey by the Pensions and Lifetime Savings Association (PLSA) found that a single person in retirement typically needs between £20,000 and £30,000 per year to achieve a “comfortable” retirement. However, many workplace pensions will only provide a fraction of this amount.
You should carefully consider what your retirement will look like and work backwards to calculate how much you need to save. The earlier you start contributing to your pension, the better positioned you’ll be to achieve the lifestyle you want.
What Other Savings Do You Have?
Your workplace pension is just one piece of the retirement puzzle. Other savings and investments - such as ISAs, property, stocks, and personal savings—play a vital role in ensuring you can retire comfortably. It’s important to track all your assets and factor them into your retirement planning.
Many people overlook the importance of non-pension savings. If you rely solely on your workplace pension, you may find yourself facing a shortfall in retirement. If you can build up savings outside of your pension pot, you’ll have more financial freedom when it’s time to retire.
Read our article - When Should You Start Saving for Retirement
Your Contribution Level
One of the biggest factors in determining whether your workplace pension will be enough is how much you’re contributing. Many people only contribute the minimum amount required under auto-enrolment, which often isn’t enough to build a large enough pension pot.
Increasing your contribution, even by small amounts, can make a huge difference over the long term. Consider increasing your contribution to 8% or 10% of your salary instead of the minimum 5%. The earlier you start, the better your chances of building a healthy retirement pot.
"The state pension and workplace pensions alone aren’t enough to guarantee a comfortable retirement. Whatever you do, you need to do something and review regularly to build up the maximum funds you need to give you the choice to retire as early as possible, and not be forced to work because you do not have enough money" - Luke James
Employer Contribution Level
Another factor to consider is the level of employer contributions. Many employers offer to match your contributions up to a certain percentage, but many employees don’t take full advantage of this. Not contributing enough to receive the full employer match is essentially leaving free money on the table.
If your employer offers salary sacrifice or higher contribution levels, you should consider taking advantage of these benefits to maximise your savings.
Fund Performance
The performance of your pension fund is critical to the growth of your pension pot. While you may not have full control over the performance of your workplace pension, it’s important to regularly review the investment options within the scheme. A poor-performing fund can leave you with significantly less at retirement than expected.
It’s a good idea to periodically review your fund performance and, if needed, switch to a better-performing option within your pension plan.
Inflation
One of the hidden threats to your retirement savings is inflation. Over time, inflation erodes the purchasing power of your pension pot, meaning that the same amount of money will buy less in the future.
This is why it’s so important to consider inflation in your retirement planning. A pension that may seem like enough today may not be sufficient 20 or 30 years down the line if inflation continues to rise.
Withdrawal Strategies
When it comes to accessing your pension in retirement, you’ll need a clear withdrawal strategy to ensure your money lasts. It’s important to think about how much you’ll need to withdraw each year, and what effect that will have on the longevity of your pension pot. This is most important in the years prior to retirement.
State Pension
While the state pension provides a basic level of income in retirement, it is not enough to live on comfortably. The full state pension in the UK is around £230.25 per week*, which works out to roughly £10,500 per year. This is far below the amount most people will need for a comfortable retirement.
For most people, the state pension should be viewed as a supplement, not the main source of retirement income. You’ll need to rely on additional savings, such as workplace and private pensions, to ensure you can maintain your desired lifestyle in retirement.
*At time of publish – for the latest numbers visit GOV.uk
Summary
In conclusion, while a workplace pension is an essential part of retirement planning, it is unlikely to be enough on its own to provide the retirement lifestyle most people desire. To ensure you can retire comfortably, it’s important to take a holistic approach to your retirement savings, considering personal pensions, employer contributions, and additional savings outside of your pension pot.
The earlier you start planning and contributing to your pensions, the better equipped you’ll be for retirement. Don’t rely on your workplace pension alone - take control of your retirement planning and ensure you have enough to enjoy the retirement you deserve.
Ready to maximise your pension savings? Contact Lucent Financial Planning today to review your retirement plans and secure a brighter future.
Disclaimer: This article does not constitute financial advice. We recommend that you speak to a qualified financial planner for advice tailored to your individual circumstances and goals. Financial markets may go up or down, and you are not guaranteed a return on your investment. Past performance is not necessarily a guide to future performance.
