£214k, for half an hour of work – Is your pension missing out?

£214k, for half an hour of work - Is your pension missing out?

It could be the easiest £214,200.89* you will ever make. Taking no more than about 30 minutes to investigate and action. Then with the compound effect over your working life, you could have an extra £214k in your pension pot, at no additional cost to you.

But how?

By maximising your employer’s pension matching contribution scheme. This may not be news to you. But given the number of people I speak to who are yet maximise their employers matching pension contribution, I am going to assume it is at least news to some.

Perhaps in your case, your current employer doesn’t offer a matching scheme, no problem, at least you checked. It only took 10 minutes. Perhaps it’s an additional factor to consider when finding your next employer.

I’m OK, I’ve been auto-enrolled in the pension scheme

The employer’s matching contribution plan is usually a separate pension scheme, to the one you got auto-enrolled into. In my experience the matching contribution plan has always required a opt-in form to be completed as it is voluntary. This form is sandwiched in-between a wad of paper dished out by HR when joining a new company. It normally looks fairly innocuous and can easily go unnoticed. This is assuming that it is actively shared at all.

Auto-enrolment is a terrible idea

Auto-enrolment in my opinion is a terrible idea, although it was set-up with positive intentions, it could have significant unintended consequences. Why? – Because it is to easy to think of a pension as binary. You have one or you don’t. If you have one you will be fine.

The reality is that the 1% (+1% personal) contribution is unlikely to be enough for your retirement. In Australia the compulsory pension contribution is now over 9%, which is probably still not enough, but at least better. The 9% assumes that people are utilising their money effectively like paying off a house and making investments elsewhere.

How much do you need to be saving for your future?

It depends on numerous factors, some of which no-one can predict, but a rule of thumb is that it is wise to invest at least 20% of your income to your future self (Paying off debt, education and investing). You could always lower the 20% later, but it is far more difficult to catch up.

This sounds important and worth doing, but I’m like really busy right now…and can’t really afford it

If you delay a year, you may have just cost yourself a cool £15k, if you delay by 6 months £7k, by only one month, £1.2k. Given the assumptions below. If you have been working for 3 years and not taken advantage, it could have already cost you £42k!

You probably will never be able to “afford” to save, expenses have a nasty way of catching up to and overtaking income. The better question is, can you afford not to?

So what do I need to do? – If this sounds like it could benefit you

  1. Today, tomorrow or certainly sometime in the next week, investigate if your employer offers a matching pension contribution scheme and see if you are taking that best advantage of it. I’m sure you know of a colleague who is on top of these sorts of things that could help. Otherwise reach out to HR.
  2. Sign up to the scheme and maximise (assuming it makes sense to you).
  3. Take more control of your financial future by learning more:

*How did I get to £214k?

Given some basic reasonable, but strong assumptions, like that the average wage in the UK is £27,095k. I’ve also assumed that your employer would match up to a 3% contribution (anecdotal) using the salary sacrifice scheme. I’ve also assumed that you get 7% return compounded over 40 years.

Your personal contribution would be about £22k over this period (less than £50 per month) and the combined effect would be an additional £320k-£350k.

It you are earning £20k, the £214k drops to £158k but is still certainly worth doing. For someone earning £40k it is approximately £316k given the same assumptions.

A 4% matching contribution on £27k and the £214k climbs to £285k.

Disclaimer – I am not advising you to do this, it may not be suitable for you given your circumstances. The figures above are calculated, but based on some strong assumptions. My goal is to highlight that for some people it certainly worth investigating.

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