When imagining your long-term future – in my experience more difficult in your 20s and 30s –we should include how many years we could spend in retirement. Today, the Office for National Statistics Life Expectancy Calculator1, shows life expectancy at age 67 for a female as 88, with 1 in 4 chance of living to 94, and for a male 85, with a 1 in 4 chance of living to 92.
When should we start saving for our retirement?
In the previous article covering the State Pension, we established why we should be saving for our retirement. I only need look to my parents and the early retirement opportunities they now have because they began saving into a pension in their early twenties. This was not because they thought about future retirement, more that the companies they worked for had an auto-enrolment pension scheme in place.
So as a rule, the younger you start paying into a pension the better. Compound interest (interest on your interest) means the longer your money grows within your chosen fund, the more opportunity it has to offer you a comfortable financial future.
Nest is the pension people who approach us ask about the most (see ‘options on retirement’ paragraph below). There are several alternative workplace pensions which offer similar propositions, but as Nest is the largest by membership in the country, I also thought it made for a good illustrative example of a how many save towards their retirement.
What is a Nest pension?
NEST stands for National Employment Savings Trust, a defined contribution workplace pension scheme, into which both the employer and the employee makes contributions. It was introduced as part of the Government’s Pensions Act 2008, to facilitate auto-enrolment in the UK and encourage people to save for their retirement.
The scheme offers a low-charge pension provision enabling any employer to meet their mandatory requirement to enrol their eligible workers into a workplace pension automatically.2
As with all workplace pensions, eligible jobholders – those earning over £10,000 a year and aged between 22 and their State Pension age – must be automatically enrolled. If an entitled worker asks to join – those earning £6,2403 or more a year and aged between 16 and 74, an employer must also enrol them, although they are not obliged to make contributions unless they choose to. Employees can opt out up to thirty days from pension set up and are also free to take a break from paying contributions at any time.
Managing a Nest pension account
For anyone enrolled in an employer-sponsored pension scheme, it’s the employer’s responsibility to deduct pension contributions from their salary. The employer must also make some minimum contributions to top up the fund each month (see above exception). If they are using qualifying earnings to calculate contributions, the minimum contribution rates4 are:
A Nest pension is managed online which enables an employee to see how much they have saved in their pension pot at any time.
What are the options on retirement with a Nest pension?
The third option is generally why people approach us for advice. After gaining an estimate of what income their current pension pot could provide, they’re searching for additional ways to save for their retirement and to understand how taxes may affect their pension when they begin drawing funds.
Will a Nest/workplace pension provide enough income for my retirement?
So, the question is whether a pension fund from Nest, or any other employer sponsored scheme, will be enough to fund the retirement you envisage? In the final chapter of the series, we look at our expectations when we retire, how we’re doing on our current journey, and what can we do about any gaps along the way.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is dependent on individual circumstances.
Sources
1 Office for National Statistics Life Expectancy Calculator 24 July 2024
2 nestpensions.org.uk – The figures shown above are for the 2024/25 tax year
3 thepensionsregulator.gov.uk Qualifying earnings are a range – the figures are for gross earnings between £6,240 and £50,270 and represent the 2024/25 tax year
4 thepensionsregulator.gov.uk – Minimum contribution rates were last increased from 6 April 2019 and are for the 2024/25 tax year
nestpensions.org.uk
indirect.gov.uk
gov.uk – National employment savings trust