Warning: Your workplace pension might not be enough to retire on

When it was introduced in 2012, auto enrolment into workplace pensions set off a revolution in pension saving across the UK. Every employer has to enrol eligible employees into a workplace pension scheme and contribute towards it. This rule has sparked a boom in pension savings. 

Rising saving rates

Before the auto enrolment rule was introduced, around 55% of employees contributed to a workplace pension.

Last year, 87% of eligible workers in the private sector contributed to a workplace pension according to figures from the Department of Work and Pensions. A staggering £90.4bn was saved into workplace schemes during 2018 alone.

Unfortunately, while savers are putting away record amounts of money into these pensions, numbers suggest most workers are not putting away enough to be able to retire comfortably. 

Not saving enough 

Under the current auto enrolment workplace pension rules, from April 2019 the minimum total amount that has to be contributed by you and your employer is 5% and 3% respectively. 

The minimum contribution applies to anything you earn over £6,136 up to a limit of £50,000, what’s known as “qualifying earnings.“

On that basis, for a worker on the UK average wage of £35,423, the contribution would be 8% of £29,287. This works out at £2,342.96 a year, including both the personal and employer contribution.

According to my calculations, a saver starting young and putting away £2,342.96 a year could expect to have a fund of just over £200,000 when they retire — that’s assuming contributions rise with inflation of around 2% every year and an annual interest rate of 5%.

A savings pot of £200,000 at retirement would be enough to buy an annuity yielding around £7,000 a year, far below the £17,000 a year most people think they’ll need to cover the basics in retirement. 

Start your own pension 

I think these figures show that while the workplace pension might be a great tool to help save for retirement, it’s not a complete solution. As a result, I reckon it could a good idea to start your own private pension alongside the government scheme. 

Opening a SIPP alongside the workplace pension is a suitable strategy for many investors, as you don’t breach the total annual pension contribution limit of £40,000. Doing so could lump you with extra tax charges, although savers on the average wage won’t need to worry about this. 

As you have more flexibility with how you can invest your SIPP, you can search for higher returns. For example, investing in a low-cost FTSE 100 tracker fund could yield annual returns of 8% (based on the index’s performance over the past decade) with almost no risk of a total capital impairment. 

According to my calculations, at this rate of return, you would need to save an extra £150 a month or £34.62 a week over 30 years to build a pension pot worth £219,200. When added to the workplace pension, this could give you around £420,000 of savings, enough to provide you with an annual income in retirement of £18,100, assuming a retirement age of 65. 

So, while the workplace pension might not be enough to retire on, it is possible to overcome this problem with just £34.62 a week. It’s never too late to get saving for the future.