From retirement planning to the tax relief aspects, there are many reasons why a person will pay into a private pension. Today, a huge proportion of people will be doing so via auto-enrolment.
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However, it may be that some people wish to boost their pension pot by increasing the amount they pay in during their working life.
And, when it comes to finances, specialist provider of financial education and guidance in the workplace, WEALTH at work, has explained that pensions are one area where saving a little more now could make a difference on future finances.
Jonathan Watts-Lay, Director, WEALTH at work, said: “We provide financial education in the workplace and when speaking to young people, many don’t realise the difference a small increase in their pension contributions can make if they start in their 20s, compared with starting in their 30s or 40s; especially if their employer offers to match it.
“However, once we highlight that an additional saving of £500 can be made but only cost them £170, saving an extra one percent seems a lot less of a sacrifice.”
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He continued: “The bottom line is that we all need to be saving more for our retirement, not just those who are retiring in the next few years.
“These examples demonstrate the benefit of starting to save as early as possible.
“If you can afford to put an extra one percent of your salary into your pension, it will make a significant difference, especially if you start early, and if your employer will match it.”
WEALTH at work say that it could even be possible to grow a pension pot by 25 percent, by saving one percent more each year – if an employer is willing to match it and the saver starts as early as possible.
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To demonstrate this potential financial move, the WEALTH at work team have created a couple of examples.
Example 1: Charlie, 25, earning £25,000 per year
“Charlie is 25 and earns £25,000 per year.
“He plans to retire at the present state pension age of 68. At the moment he pays five percent of his salary into a pension, and his employer pays three percent through auto enrolment.
“It is estimated that his pension pot value at age 68 will be £124,177.
“If he was to increase his contribution by one percent to a total six percent contribution, an extra £250 per year would go into his pension, but the personal cost to Charlie would only be £170 due to the pension contribution being taken before tax or National Insurance are deducted.
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“The total pension contribution is now nine percent, and the pension pot value is estimated to increase to £139,699 – an increase of £15,522, an increase of 12.5 percent of the original pot.
“However, if his employer were to match his one percent increase, the total pension contribution would be 10 percent, and the pension pot value is estimated to increase to £155,221 – an overall increase of £31,044. This is more than 25 percent increase of the original pot.”
Example 2: Caroline, 25, earning £55,000 per year
“Caroline is 25 and earns £55,000 per year.
“She also plans to retire at 68, and pays five percent of her salary into a pension, and her employer pays three percent.
“It is estimated that her pension pot value at age 68 will be £273,189.
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“If she was to increase her contribution by one percent to a total six percent contribution, an extra £550 per year would go into her pension, but the personal cost to Caroline would only be £319 due to the pension contribution being before tax or National Insurance are deducted.
“The total pension contribution is now nine percent, and the pension pot value is estimated to increase to £307,337 – an increase of 12.5 percent of the original pot.
“However, if her employer were to match her one percent increase, the total pension contribution would be 10 percent, and the pension pot value is estimated to increase to £341,486 – an overall increase of £68,297.
“Again this is an increase of 25 percent on the original pot.”