Four reasons to be hopeful about your retirement

If you’ve struggled to get around to sorting out your pension savings, this week might be a good time to grab the bull by the horns.

That’s because this year’s Pension Awareness kicked off on Monday, with the campaign celebrating its 10-year anniversary.

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From 11 to 15 September, head online and you’ll find plenty of content, webinars, and clinics that can help you to take control of your retirement.

And given the worrying situation with pensions in the UK, the importance of Pension Awareness cannot be understated.

As Stephen Bird, chief executive of abrdn, interactive investor’s parent company, recently warned: “There is a very real crisis brewing for millions of individuals in the coming decades in terms of an inadequate income in retirement.”

The stats back up Bird’s claim. According to figures from the Office for National Statistics (ONS), the average pension fund for a 45-to-54-year-old is £75,500, while for those aged 55 to 64 the average pot is £107,300. These both fall well short of the £600,000 deemed necessary to fund a financially comfortable retirement.

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Lack of engagement among savers is clearly a problem. Standard Life found that three in four people have no idea how much they have in pension savings.

But amid the doom and gloom, there are some reasons to be hopeful. In the decade since Pension Awareness was launched, the retirement landscape has seen several big developments, and many have been favourable. Let’s explore four of them.

1) Free money from your employer

Auto enrolment has been a roaring success since its introduction just over 10 years ago. Pension participation among eligible workers has more than doubled from 42% to 86%, while the total annual workplace pension contributions have increased in real terms from £41.5 billion to £62.3 billion.

Under current rules, if you pay 5% of your salary into a pension, your employer must pay in 3% - within certain limits. This is effectively free money. And many employers will offer to pay in more, although you might have to match their contributions.

Abrdn’s Bird recently said that current minimum contribution levels should be doubled. If applied to the current split, that would take contribution rates to 10% and 6% for employees and employers, respectively.

It’s a bold suggestion, but one that makes a lot of sense. With defined contribution (DC) pensions, where you build a pot of money that can be used to provide income in later life, what you get out depends very much on what you put in.

The government, however, currently has no plans to increase these minimums. Still, it would be wise to consider upping your personal contributions if you can afford to.

2) Greater freedom and choice

When then-chancellor George Osborne announced the pension freedoms in his 2014 Budget speech, we knew it would prove a seminal moment for how people choose to draw retirement income. Osborne declared that from April the following year “no one will have to buy an annuity” and instead we would be afforded the flexibility to draw our pensions however we please.

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Early fears that retirees would raid their pots and blow the cash on fancy sports cars haven’t come to pass. But the anticipated shift from annuities to drawdown most certainly has. And the good news is you can still buy an annuity if you want to – whether at the point of retirement or further down the line.

The upshot since freedoms is that you now have more choice to take retirement income in the way that suits you, which is a good thing.

3) More generous tax allowances

The 2023 Spring Budget saw several changes to the pension system that benefited savers.

The decision to scrap the lifetime allowance - meaning there’s now no cap on what you can save into your pension and nor be hit with punitive tax charges - was a shock, but a welcome one.

You now also have more scope to pay into a pension and get income tax relief at your marginal rate.

The annual allowance has risen to £60,000, helping anyone looking to make up for lost time by ploughing hefty lump sums into their pension in the years leading up to retirement.

And with the tapered and money purchase annual allowances both rising from £4,000 to £10,000, high earners and those already drawing retirement income also have greater capacity to top up their pension savings and get a boost from the government.

4) Better access to information (coming soon...)

A bright spot on the horizon is pensions dashboards, which (once live) will enable you to access all your pension arrangements securely in a single online hub, making it easier for you to engage with your savings. You’ll have a clearer idea about what your pension pots are worth and how much you’re being charged. It will also reduce the risk of pensions being misplaced or lost.

The one sticking point here is that the project’s launch was recently delayed and is now due in October 2026. This has been frustrating, but we can forgive the government for pushing the timetable back. There are few prizes for rushing out a product that doesn’t give you what you need.

Now is the time to get engaged and take action

While the dashboard is clearly an important step, we can’t kid ourselves that it’s the silver bullet to avert the potential retirement crisis.

Becoming more engaged is really the first rung of the ladder - it’s the action you take once engaged that counts.

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Admittedly, the pensions and savings industry could do more to make your lives easier; we appreciate that understanding how pensions work can be a minefield at times. We must help to bust myths, untangle some of the messy jargon, offer useful hints and tips, and ultimately give you the confidence to make sound choices about your financial future. That’s what Pension Awareness is all about.

Whether you’re just starting out on your savings journey or edging towards retirement, it’s never too late to make a difference – although I can’t stress enough that the sooner you can get going the better. If you want to gauge where your current savings are in relation to your retirement income goals, then try out our handy SIPP calculator.