The introduction of auto-enrolment has ensured that everyone who works for an employer can benefit from their company’s pension scheme. Unfortunately, the amount of money put aside is unlikely to be sufficient to meet many people’s retirement goals.

If you want to enjoy your retirement – particularly if you have dreams of travelling or taking up new hobbies – you’ll need to invest additional money each month to fund a decent lifestyle.

Why isn’t a workplace pension sufficient?

Auto-enrolment makes it compulsory for employers to automatically enrol their workers into a pension scheme.

It’s a welcome development because it ensures employees don’t miss out on valuable pension benefits. The problem is that current contribution levels are very low.

Qualifying earnings are how much you earn (before income tax and National Insurance contributions are deducted) that falls between a lower and upper earnings limit set by the government. At the moment the range is £5,876 to £45,000.

The first £5,876 of earnings isn’t included in the calculation to determine auto-enrolment contributions.

Let’s say your salary is £24,000. Your qualifying earnings would therefore be £18,124 and the total amount paid into your pension each year would be £362.48, or £30.21 a month.

The minimum total contribution levels are due to increase to a total of 5% in April 2018 and then 8% in April 2019.

Fiona Tait, technical director at retirement planning adviser Intelligent Pensions, says these minimums are unlikely to be enough to provide anything approaching the level of pre-retirement income needed.

Steve Webb, director of policy at pensions company Royal London, recommends taking full advantage of any ‘matching’ contribution by an employer.

‘If your employer will put in an extra pound (or more) for each pound you contribute, that is a rate of return you would struggle to get in any other investment,’ he says.

Emma Welling, employee benefits consultant at financial services group Mattioli Woods, suggests employees analyse their workplace pension and ensure they don’t just remain in the default fund. Default funds tend to be comprised of ‘safe’ investments which might not grow your money sufficiently.

How much do I need in retirement?

What constitutes a good retirement income will depend on your individual circumstances, such as your mortgage payments and day-to-day living costs.

Tom Selby, senior analyst at AJ Bell, says a reasonable benchmark is around 70% of current earnings. So someone earning £40,000 might target an annual pension of around £28,000.

‘With the flat-rate state pension providing around £8,000 of retirement income, the remaining £20,000 would need to come from their private savings. To put that in context, it could cost a healthy 65 year-old over £600,000 to buy a guaranteed inflation-linked income of £20,000 a year through an annuity,’ says Selby.

How do I start?

The first step is to work out how much income your workplace pension is likely to generate in retirement. You can usually
find this out by looking at the annual statement from your
pension provider.

The idea of saving over £600,000 by the time you’re 65 is intimidating, but it’s important to remember that many people are choosing to retire later or work part-time to supplement their
retirement income.

In addition, you might decide to keep your retirement pot invested beyond age 65 and look to benefit from extra stock market growth.

‘Given the continuing rise in life expectancies, the reality is that someone aged 65 could well have an investment time horizon of 30 years plus,’ says Selby. ‘This is a significant period of time in investing terms, although clearly their appetite for risk will depend on their other assets and income sources, and if they are drawing an income from their pension.’

Ideally, you should start saving early so you can benefit from compound investment growth.

Which tax wrapper to use?

There are lots of different tax wrappers you could consider using alongside your work-place pension.

A self-invested personal pension (SIPP) is a form of pension that lets you take control of your investments yet still benefit from government tax relief.

ISAs enable you to make tax-free withdrawals at any age, which is appealing if you think you might need to access some of your money before retirement.

The Lifetime ISA, which launched this year, includes a 25% government bonus payment on up to £4,000 of savings a year.

Webb at Royal London says the biggest mistake would be to leave your money in a cash ISA. Headline interest rates are close to zero and with inflation running at 2-3%, your money would lose
real spending power year.

LIFETIME ISA – THE KEY FACTS

Lifetime ISAs can be opened by people aged over 18 and younger than 40. You can either have a stocks and shares version
or a cash version.

You can invest up to £4,000 in a Lifetime ISA each year as a lump sum or in chunks. The government pays a 25% bonus on your savings. The bonus is paid every year until you hit age 50. The bonus is paid on contributions, not interest or stocks and shares growth/loss.

The wrapper allows
tax-free withdrawals without penalty at any age for the purchase of your first home or if you become terminally ill.

For all other situations, you cannot access the money until you reach age 60 unless you pay a 25% penalty.

Which investments should I consider?

Before picking investments you need to decide what investment risk you’re willing to take. This will depend on your investment time horizon and personal circumstances.

Alex Brown, wealth management director at Mattioli Woods, says if you have 20 years until retirement you could opt for higher-risk investments like equities. This is because you have time to weather any market volatility.

As you get closer to retirement you’ll need to think about which retirement income strategy to use, for example income drawdown or an annuity.

‘For some investors this may mean completely de-risking towards cash and other low-risk investments. For others it may mean remaining in equities but altering the portfolio to one which is tailored to their individual circumstances and need for cash and income in retirement,’ explains Tait at Intelligent Pensions.

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