I had a slightly concerning (well, to me anyway) phone call the other day.
It was from a staff member at a company whose pension we look after, who was in their late twenties.
We’d had a meeting last week about the recent increases to Auto Enrolment pension contributions, from 3% to 5% (gross) for the member and from 2% to 3% from the Employer, to work out how much this was going to work out at and how much extra difference this increase could make to their future pension savings at retirement.
Indeed (based upon a number of assumptions) this increase would potentially add well over £100,000 to their pot at state pension age, which obviously significantly impressed them.*
The phone call was to tell me that they had been speaking to their family and that they had since decided to cease all pension contributions as they wanted to purchase a house and they had been advised to direct all savings in this direction.
Now, I fully understand the need to ensure a foot on the housing ladder – it’s clearly more difficult now than ever. But, I also have to question the wisdom of not paying into the pension.
Firstly, whilst they will be saving the cost of their contribution, they will also be turning down what is in effect free money from the employer – 3%. Also, they won’t get the tax relief from the Treasury – effectively a further 1% of salary. And perhaps most significantly, the vast reduction in the potential total pot at retirement.
So, the question.
What’s right? Which is the correct priority?
I’d argue both, if that’s at all possible. Clearly people need to live somewhere, be able to put food on the table, cloth the family, fuel the car and do all of the essential things. On the other hand, we have something of a ticking time-bomb if people in their twenties and thirties don’t save anything to a pension – there will be a massive income shock if all they have to live on in retirement is the state pension.
My advice? Look at where money is being spent superfluously. Could you have one less drink on a Friday night? Could you cook in rather than order a takeaway one evening? Could you walk to town rather than order a taxi?
If any of these are possible, you’d be amazed how much you save.
Perhaps enough to make that pension contribution and be able to look forward to a retirement in which you may be able to live, rather than exist.
Publish date: 30th April 2019