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Sarah Smart, Chair of the Trustee at The Pensions Trust. |
Q. “I’m currently on a defined contribution pension scheme, but my employer is asking me to raise my pension contributions from 3% to 5%. I’m only 35 and have two young children and they are my priority, not my pension, at the moment. What should I do?”
First of all, congratulations for being a member of your employer’s pension scheme. There are many people who are eligible to be members of pension schemes at work but aren’t. These pension schemes are an important part of saving for retirement, and so you have already taken an excellent first step.
I know that 35 seems like an awfully young age to start thinking about retirement, particularly when everyone is telling us that we will all have to work longer. However, the more you can save now and the longer you can save for, the better chance you have of having a decent standard of living when you do retire. How much you save, though, clearly needs to be weighed against the things you need to pay for now.
Before you make a decision you will need to sit down with your family and work out whether you can afford to reduce the amount of money that you are bringing home. I cannot make that decision for you, but I have set out a few things that you should think about when you are coming to your decision.
• A very important question is whether your employer also makes contributions into the pension scheme. Most employers do, and many employers will match the level of contributions you are putting in. This means that you will actually be getting a lot more into your pension scheme than the difference in your monthly pay cheque.
o For example, if you are earning £20,000 a year and you increase your pension contributions by 2% of salary, your take home pay will reduce by £320.00pa (£26.67 per month). Assuming that your employer matches any contribution you put into the scheme, once you take into account the employer’s contributions and the fact that pension contributions are tax free, the extra amount going in to the scheme for you is £800.00pa (£66.67 per month). So it is almost like free money!
• You should check what facilities your employer makes available to you to help you make your decision. There may well be a pension section on the intranet which will allow you to do a calculation similar to the above based on your own situation. You may even have access to an independent financial adviser who would be able to talk you through all the things to think about. If you aren’t sure what’s available, speak to someone in the HR department and ask them.
• If you feel that you cannot afford to make any extra contributions at the moment, you should consider increasing your contributions next time you get a pay rise. For instance, if next year you are lucky enough to get a 3% pay rise, you could ask for your pension contributions to go up by 1.5%. This means that you don’t have to see your monthly take home pay go down when you increase your contributions.
Sorry I can’t tell you what to do, but I hope that thinking about these areas will help you come to a decision that is right for you.