15th July 2016 at 9:58am
He’s in his mid-twenties, makes a good living and is enjoying life. Joe’s recently been auto-enrolled into his company’s pension scheme but, like many of his friends, he isn’t really sure how pensions work.
Our quick video takes a closer look at how Joe’s pension works for him and how a few simple changes can have a positive effect on his pension. So let’s watch and see what this really means for Joe – now and in the future.
He’s in his mid-20s and pulling in around 25 thousand a year.
And he’s enjoying life – as he should be. Good stuff Joe.
Joe plans to retire at 65, and he’s just been auto-enrolled into his company’s pension scheme. But the problem is Joe doesn’t really understand how pensions work.
At the moment, Joe’s overall pension contribution is 9% of his salary, or £188 a month.
Which means his pension fund will be just over £170,000 when it’s time for him to put up his feet and retire.
Or, he’ll have a fixed income, or annuity, of around £400 per month.
But what does this really mean for Joe?
Well, if this was to be Joe’s final salary when he retires…
…the annual income from his retirement will be this.
Which will be a replacement income of just 11% of what he’ll potentially be earning. That’s not going to get Joe a lot of holidays in the sun. But, Joe doesn’t have to worry.
There are a few easy things that he can do to make a big difference to his income when he retires. The future’s in Joe’s hands.
The first thing Joe needs to realise is that it’s not just him contributing.
This is Joe’s part…
…then there’s the tax and National Insurance savings…
…and also Joe’s employer’s contribution.
So, if he was to pay in an extra £50 a month, which is 2.4%…
Then all the other contributions would go up too…
…giving Joe an extra £116 or 5.5% in his pension each month. Which means that Joe’s overall fund from before…
…will go up by over £100,000. Which is great…
…but, £50 a month is quite a lot for Joe at the moment.
It could mean less going out and having fun. But, fear not. There is another way.
Joe can increase his contribution rate by just 1.5% for each of the next 5 years – and save more tomorrow.
So, for just £25 a month net each year…
…Joe’s monthly contributions, including his tax and national insurance savings, will go up.
And, that means his employers’ contributions will go up too. It’s a win-win.
Plus, if his salary rises by more than 1.5% his take home pay won’t even be reduced. Nice. And easy.
And, this means that Joe’s overall fund from before…
…will go up by over £170,000.
But, there are other easy steps Joe can take to improve his future earnings even more. And they’re all in his hands.
Like combining together your pension with an existing pension from another provider. Joe has one for £20,000.
The kind of investment that Joe’s pension uses is also in his hands. By looking into his investment…
…Joe might decide to change over his funds.
Choosing a fund is very important and the right fund, which outperforms his current fund by just 1% can have a big impact on his overall pension.
In fact, this simple change could add over £90,000.
If we take a closer look, we can see how this change of investment can have so much of an impact on Joe’s pension over time.
Remember Joe’s annuity from before? Well, when we add in these simple changes that he’s made, this will increase up to well over £1,000 a month. Now that could come in handy.
And, if this was to be Joe’s final salary, then his replacement income could be looking a lot rosier thanks to the changes he’s made.
Plus, when you include his state pension, Joe will end up with a 18% rise in total – which is over £21,000 a year.
And, to get his pension in such a good place, Joe only had to contribute 17% of his final fund.
Which is pretty impressive when you consider what a difference it could make. And, it’s all because Joe took the future in his hands.
Maybe it’s time you did too.
The information in this blog or any response to comments should not be regarded as financial advice and is based on our understanding in July 2016.