It is very important for employees to save towards retirement and of course many are not saving enough. However, some may not need as much as they think according to WEALTH at work, a leading provider of financial education, guidance and advice in the workplace.
For some individuals once they retire, they will be paying significantly less income tax, have no National Insurance (NI) or pension contributions to make, mortgages and loans may be paid off, and children could be financially independent. Some may actually achieve the same disposable income levels in retirement or at least similar, even if their pension income is for example, half what their salary was when they were working. Therefore, it is important for employees to review how much income they think they will need in retirement as early as possible, to have a better understanding about what they need to be saving now.
The following examples* are for demonstrative purposes only and are based on an active individual with no health issues, contributing towards their pension through salary sacrifice for the tax year 2015/16.
Example 1
Mark has a salary of £26,000 p.a. and is making a 5% pension contribution towards his final salary (defined benefit) scheme. He plans to have paid off his £6,000 p.a. mortgage and £2,400 p.a. loans by the time he stops working. When he does retire, he will also no longer have to pay £2,820 Income Tax, £1,997 National Insurance or £1,300 into his Pension. Therefore, to have the same amount of disposable income as he had when he was working (£11,483), Mark needs an annual pension income of £11,704, leaving a disposable income of £11,483 after tax.
Example 2
Joanne has a salary of £40,000 p.a. and is making a 10% contribution towards her pension. By the time she retires she intends to have paid off her mortgage of £10,000 p.a. She will also no longer have to pay £5,080 Income Tax, £3,353 National Insurance and £4,000 into her Pension. Therefore, to have a similar amount of disposable income she had when she was working (£17,567) she needs an annual pension income of only £19,309, leaving a disposal income of £17,567 p.a. after tax.
Jonathan Watts-Lay, Director, WEALTH at work said: “Once employees retire their day to day costs will likely change. They will often be paying significantly less income tax, have no National Insurance (NI) or pension contributions to make, and often mortgages and loans are paid off. They may want to spend more on holidays, leisure and hobbies, and utilities may go up if they are at home more, but these costs, depending on their circumstances, may not rival the ones that have reduced.
“If the predicted income on their pension statement is much lower than expected, employees should not bury their head in the sand believing that they will never be able to save enough for retirement. Instead they should work out how much they really will need, and they may find that it is significantly less than their present income. However, it is still important for employees to ensure their savings can cover any debt and to make sure that they are making sufficient pension contributions whilst they are working so that the retirement income generated will meet their needs.
“I believe a structured programme of financial education delivered in the workplace can help employees understand their options in the lead up to and at the point of retirement. Then, once employees reach retirement, regulated advice should be offered to all, providing tailored information to their specific needs.”
*These examples are used for illustrative purposes only and must not be relied upon to make any calculations or financial decisions.