Pension savers have been urged to make sure they understand the rules about how their scheme works as they may be contributing less than they think.
Under the pensions auto enrolment rules, workers have to be added to a workplace scheme with a minimum contribution of 8%, which is often made up of 5% contributions from the employee and 3% from the employer.
However, it’s important to note that this 8% you pay in is not actually your full earnings but only those over a certain threshold.
Steven Cameron, pensions director at Aegon, explained: “One important detail that many people don’t appreciate is that these minimum contribution rates apply not to your full earnings but to your earnings over £6,240 and up to £50,270.
“So if you are earning £20,000 a year, your minimum contribution isn’t 8% of £20,000, which would be £1,600 a year – it’s 8% of the excess of £20,000 over the ‘offset’ of £6240, which works out at £1,100. This is actually 5.5% of your total earnings, so less than you might have thought.”
He warned this would have the biggest impact on low earners, as someone who earns £12,480, which is double the £6,240 offset, would only pay in the equivalent of 4% of their total earnings.
To be automatically enrolled, you have to be earning at least £10,000 a year and be aged between 22 and state pension age. Plans are underway to extend this to workers aged 18 and over, and to any level of income.
Mr Cameron also urged people to be more aware of how their pensions work as they may not be building up enough funds for retirement.
He said: “Unfortunately, for most people, the auto-enrolment contribution levels are unlikely to provide a particularly comfortable income in retirement, even on top of the state pension.
“It’s worth checking the details of your workplace pension scheme. You should have received information when you were auto-enrolled, and you should be able to check how much you’re paying in from your payslip.
“Alternatively, you can ask your employer three questions: what the contribution rates are, if a ‘salary offset’ applies and if they are prepared to match any extra contributions you pay in.”
Turning to how pensions could be made easier to understand for employees, some experts have shared their views on what tools are available and how things could be improved.
Mike Ambery, retirement savings director at Standard Life, part of Phoenix Group, said: “Accurate and engaging communications are key to ensuring people get the most out of their pension and set themselves up for a decent retirement.
“If done well, they encourage people to interact with their savings and make sure both their current contribution levels and underlying investments and charges are keeping them on course for the standard of living in retirement they hope for and expect.”
Standard Life has a Retirement Income Tool you can use to work out how much finances you may have available in retirement and what kind of lifestyle you can afford.
Mr Ambery added: “Ideally communications would be available in multiple formats, including multimedia content like videos and podcasts as well as traditional text statements, which can still be useful for a snapshot picture – we use ours to show a clear breakdown of employee and employer contributions as well as investment returns.”
Damien Rylett, partner and chartered financial planner at Saltus, suggested other ways to make it clearer how much you are paying in to your pension.
He said: “Alongside payslips, they could display not only the amount but also the percentage of salary being contributed to the pension.
“This could include employer contributions and employee contributions, alongside the total value of the pension pot so far. Including a comparison to industry benchmarks or suggested contribution rates for retirement goals could help employees better understand if they are on track. There is plenty of technology available these days that would allow employers to do this.”
He commented that most pension providers do have an online portal, but this is rarely communicated well to employees.
He said: “A mobile app showing live updates of the pension balance and contribution history, along with real-time financial advice based on market trends and personal situation can boost engagement. Pension providers often use jargon that can confuse employees.
“Using plain language, infographics, and real-life examples to explain contributions, fund growth, and withdrawal options.
“Employers and providers could make better use of video explainers, infographics, or FAQs to explain pension basics like contribution levels, how pensions are invested, and tax implications in an easy-to-digest format.”
