For a long time, as soon as I saw or heard the word ‘pension,’ I immediately switched off. Workplace pension contributions equalled something boring that I didn’t need to know about until much later in life. For the last two years I have been pootling along and contributing the minimum amount required (3% of my salary at the time of writing), and up until recently I hadn’t really given my pension a second thought. However, since learning more about personal finance, it became all too clear that a 3% pension contribution just wasn’t going to cut it. You hear, read, and see varying opinions about how much you should be contributing to your pension, and at what age- but what is the right answer?
I suspect that my previously lackadaisical attitude towards workplace pension contributions is the same as many millennials’, where the here and now seems more important than our distant future as retirees. But really, who wants to be working until they are well into their 70s? Is this really it? Working from now until we peg it? It certainly seems that our destiny is heading in that direction unless we actively decide to do something about it.
That said, the reality of workplace pension contributions is that the amount you decide to contribute depends on your own personal circumstances. My younger brother, for example, (a very sensible young lad!) has decided that he will contribute the equivalent of half of his age. He’s 23 and so contributes a huge 11.5% of his salary to his workplace pension every month. His workplace matches his contribution up to 4%, so he’s making the most of this and also topping this up with every year that he grows older. He lives in Edinburgh and is very severe with his budget- no eating out, no takeaways, strict meal plans, and minimal travel- and also prefers to live a minimalist lifestyle. For him, he chooses to make this large pension contribution at this time in his life when it suits him.
By comparison, I’m 25 and contributing 12.5% of my salary to a workplace pension feels like the impossible when I’m also trying to save hard to get a mortgage deposit together, and also want to make the most of my time living in London. My employer contributes the minimum 2%, and so for me and my situation right now, making such a large contribution just isn’t feasible. So that left me with the question- what percentage DO I contribute when 12.5% is too high, and 3% is too low?
Luckily, at work, we had the great opportunity a few weeks ago to speak to a financial advisor for free which was really useful and insightful. I told the advisor that I had been thinking about upping my pension contribution for the last few months, but really wasn’t sure how much to increase it by- I certainly didn’t want to take a leaf out of my brother’s book and contribute 12.5% at this stage.
After speaking with him, he reassured me that keeping my focus on saving for a mortgage deposit (in my Lifetime ISA) sounded like the right thing to do, for my circumstances, at this moment in time. He suggested that I increase my workplace pension contribution to at least 5% (which will be the new minimum contribution in April 2019). Then, if I still wanted to save a higher percentage of my salary, more to the tune of the 12.5%, I could add this to my mortgage deposit savings pot, or even invest this into a stocks and shares ISA (something which I am looking to implement in the next few weeks- but more on that in another post!)
The beauty of not going all in and contributing 12.5% to my workplace pension every month, and instead putting the balance money elsewhere, is that I can withdraw money should I desperately need to. It’s important to remember that once you have contributed money to your workplace pension, you can’t get it back until you retire- something that is quite literally a lifetime away. Before thinking about increasing your contribution dramatically, it is worth looking at what your current goals are, what your lifestyle is like, and whether you are going to be needing that money or not in the next few years. If you increase your pension contribution when you are 28 after buying your own home, instead of at 25 whilst saving for a mortgage deposit, it’s probably not going to matter too much in the long run. After all, a property is an investment too.
So, what have I decided to do? I requested that my contribution to my workplace pension is increased to 5% ahead of the increase next April 2019. Yes, it’s not a ground breaking amount of money, but it suits me and my current lifestyle choices and aspirations. If you are also thinking about increasing your contribution, all it takes is an email to the relevant person at your workplace, and the deduction will most likely be made from your next monthly pay cheque.