Zarah ChoudharyMoving to an employer that pays 5% into a pension rather than 3% could boost retirement savings by £116,700 for someone earning £35,000, figures from interactive investor have revealed.
As the State Pension rises an inflation-beating 4.1% this week, interactive investor released calculations showing that average earners could boost their retirement savings by £243,200 with three simple steps.
While the full State Pension has increased by £470 to £11,973 a year, it still falls short of the amount needed for a basic retirement income.
According to interactive investor, it is vital to make the most of personal pension savings, including workplace pensions and any additional provision such as a self-invested personal pension (SIPP).
Camilla Esmund, senior manager at interactive investor, said: “One of the key ways investors can boost their retirement savings is by checking how much they are paying in fees, and to make sure they are not overpaying.
“While at interactive investor, we feel like we talk a lot about charges, and are proud of our transparent monthly flat subscription fee, our research consistently shows that many retail investors don’t know how much their annual pension charges are.”
She added: “It can be disheartening to integrate good habits, stick to your investment strategy for the long term and see the fruits of compounding take effect over time, only for your growing pot to be eaten away in unnecessary fees.
“Over decades, the differences can add up to tens of thousands of pounds. Importantly, paying over the odds means less wealth for you to enjoy down the line.”
Interactive investor has also urged investors to ‘dare to compare’ how much they are paying in fees, launching a new comparison tool.
The firm has advocated for using salary sacrifice and reinvesting the tax saving into a SIPP or workplace pension to further increase retirement wealth by between £15,800 and £27,700.
Salary sacrifice allows employees to give up part of their pay in exchange for a pension contribution, saving both income tax and national insurance.
Basic-rate taxpayers benefit the most, saving £8 in national insurance for every £100 contributed, compared to £2 for anyone earning above £50,270.
Someone earning £35,000, contributing 5% of their pay and redirecting a £12 monthly national insurance saving to their pension could increase their pot by £27,600 over 40 years.
Investing £50 of a pay rise into a SIPP or workplace pension each month could boost pension wealth by £98,900 by retirement, assuming 5% investment growth and 2% annual increases.
For a basic-rate taxpayer, this would only cost £40 after tax relief.
Higher- and additional-rate taxpayers would pay £30 and £27.50 respectively.
Assuming an employee has maxed out their employer’s contributions, they can either increase contributions to their workplace scheme or use a SIPP for greater flexibility.
According to interactive investor, together these three steps could add up to £243,200 to an average earner’s pension by retirement.
Esmund said: “It’s encouraging that you don’t need to be a high earner to add substantial sums to your pension with some modest tweaks.
“Taking simple steps like filling in salary sacrifice forms or checking employer contributions when you move jobs could boost your pension significantly over your working life.
“Although the State Pension has improved in recent years, it still isn’t enough for a comfortable retirement. So, taking steps now to boost your workplace pension is vital to get your retirement savings on track.”
She added: “Not everyone is in a position to move jobs, but when the time comes, it’s vital to find out more about the pension. It forms a crucial part of your pay package and varies significantly between employers – some pay in just 3% while others pay up to 15%.
“If you want to top up your pension, then using a SIPP alongside your workplace pension can be a great way to build retirement wealth.
“A SIPP allows you to tweak your contributions each month, which is really useful if you have some more expensive months and want to vary the amount you pay in.”
