Is auto-enrolment lulling you into a false sense of retirement security?

When you now start a new job, your employer doesn’t only have to offer you a workplace pension, it has to pay into it too.

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Even better, you don’t have to add “join workplace pension” on to your to-do list. So long as you’re aged between 22 and state pension age and earning over £10,000, you’ll be “auto-enrolled” on to your employer’s scheme – if you don’t want to join, you don’t have to, but it will be down to you to pull out.

So-called auto-enrolment has been an undeniable success. The process was rolled out from 2012 and in the decade that followed nearly 11 million people started saving for retirement. The number of women putting money away increased by around 50%, while the number of twenty-somethings that save doubled.

However, while getting millions more saving for retirement is a great start, it hasn’t got the same numbers engaged with pensions. And, if you aren’t clued up about how much you’re paying in, or whether it’s enough, there’s a very real risk it’s lulling you into a false sense of retirement security.

But you don’t have to sleepwalk into retirement. In a few simple steps it’s possible to find out where you stand and, if necessary, put in place some changes that could make all the difference to your future financial well-being.

1) Find out how much you’re really paying into your pension

Auto-enrolment rules stipulate that you pay a minimum of 8% into your pension – that’s at least 3% from your employer, with the rest paid by you.

The catch is that minimum contributions only need to be based on your qualifying earnings, not your actual earnings. Currently, qualifying earnings are the range between £6,240 and £50,270. That means the maximum contribution your employer is required to make is 3% of £44,030 – which works out at £1,320.09 – and that once your earnings breach the higher-rate tax threshold (£50,270), your employer isn’t obliged to pay any more into your pension.

That means, the more you earn, the lower your actual contribution will be, as a proportion of your overall salary.

But not all employers are equal. While some will pay the bare minimum, others are more generous. For example, some will base contributions on your total salary and others will pay more than 3% too. It’s not unusual for firms to match contributions – meaning the more you agree to contribute, the more they will pay in as well.

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Approaches vary, but analysis from the Department of Work and Pensions (DWP) show that employees in smaller firms are more likely to be saving at the minimum level required.

For example, 47% of workers in firms with five to 49 staff members will make the minimum contribution, compared to just 20% in businesses with 250 to 4,999 employees.

The industry you’re in can have an impact on pension provision too. The average employer contribution for those in financial services is an impressive 9.4%, compared to 3% for those in construction.

If you don’t know the deal you’re getting, check with HR.

2) Pay more into your pension if you can

It’s important to be aware that the 8% minimum contribution is a starting point – it’s not a guideline or recommendation for how much you need to save.

And it’s widely acknowledged that if you want a comfortable income in retirement, you will need to save more.

There have been calls to increase minimum contributions to 12%, but it’s a difficult balancing act for policymakers as it would place additional pressure on businesses and could mean more employees opt out.

But small – and affordable – increases over an extended period could make a big difference to your future financial security.

Let’s take the example of Sam, a marketing director at a tech start-up. He earns £80,000, but as his employer’s finances are still pretty stretched, he’s only getting 3% of qualifying earnings going into his pension, along with the 5% he pays himself.

This minimum contribution means he gets £293.53 going into his pension each month – made up of £110.07 from his employer and £183.46 from himself (including tax relief).

After 30 years, and with a 3% annual increase to his contribution (to reflect rising salary), his pot would be worth £347,527 (assumes 5% investment growth a year) when he retires.

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But, if Sam could pay in just £200 a month more (which would only cost him £120 once higher-rate tax relief has been applied) he’d pay a total of £493.53 into his pension each month and end up with a pot worth £584,318.

Even if you get more generous contributions from your employer, or your contributions are based on your total earnings, a good rule of thumb is to pay more into your pension, if you can.

Each year, you can pay 100% of your earnings, up to £60,000, into pensions and get tax relief on contributions - effectively rebating that tax you would have paid on that income.

It might feel like a squeeze, but your future self will thank you for it. Not many people reach retirement wishing they had paid less into their pension.

3) Take control of your retirement savings

Your workplace pension will let you pay more into your pension – you just need to update your instructions.

But it’s not the only option – you could take control of your retirement saving with a new personal pension.

When you get a new workplace pension, each time you change jobs, it’s easy to build up a collection of small pots, which can be difficult to manage and keep track of. Throw in a house move or two and it’s easy for pensions to get lost.

For many savers it makes sense to combine these smaller pensions into a standalone personal pension, such as a self-invested personal pension (SIPP) before they go AWOL (you just need to make sure that you won’t lose any valuable benefits like guaranteed annuity rates first).

Consolidating pensions that you no longer contribute to can make it easier to see how much you have saved for retirement and keep tabs on your investments.

You will typically get access to much wider choice of investments with a SIPP and, as modern online pensions typically have lower charges, you’ll often save money too. As charges are deducted from your investments, over the years, lower charges can give your pot a substantial boost.

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You can also use these pots to make additional contributions to your retirement saving – either with monthly top-ups or ad hoc contributions when you’ve got the cash.

You just need to make sure that if you pay higher or additional rate tax, you claim the full rate of tax relief you’re entitled to. Personal pensions will only apply the basic rate of tax relief (20%) automatically, but you can claim a further 20% or 25% using HMRC’s new online service or by completing a tax return each year.

Your own personal pension can be a great way to really take charge of your retirement saving – especially if you’re climbing the career ladder and changing jobs regularly.

But it’s still important to keep paying into your current workplace pension as you wouldn’t want to miss out on your employer contributions.