30 Apr 2019
As part of our series on planning and preparing for later life, Jess Kuehne takes us through a conversation she had recently with a former colleague, who only began contributing to a pension scheme at the age of 36.
“How much of your salary do you want to contribute to your pension?”, the HR manager asked me.
There I sat on my first day of work, being asked a question I had absolutely no idea how to answer.
“I dunno…”, I mumbled, before asking, “What do other people contribute?”
“Most other people put in about five per cent,” she said.
So, at age 22, without any further advice or guidance, I began to contribute five per cent to my workplace pension. I had no idea if that was enough, but I had nothing else off of which to base my decision in that moment.
This experience helped shape much of my future behaviour. Put aside for a moment whether or not I was contributing the right amount**, I was lucky in that I began my working life with a workplace pension that both I and my employer contributed to. This set the tone for my approach towards saving for retirement going forward.
But we know this isn’t the norm for many other people. The Department for Work and Pensions has estimated that nearly 12 million people below state pension age are not saving enough to maintain their living standards into retirement.
I recently thought of a former colleague. She is 36 years old and had never, until this year, contributed to a workplace pension. I have often wondered: what stopped her from starting to save for her retirement until she was well into her mid-thirties?
When I talked to her about it recently, she made a couple of points that stood out to me:
When my colleague finished university, she bounced around between temp jobs, all of which paid very low wages, meaning she simply didn’t have enough left over to save into a pension.
As an agency temp, I was just moving from job to job and there was no pension.
Until recently, there was no requirement for employers to offer workplace pensions. Auto-enrolment makes it compulsory for employers to put (most) workers into a pension scheme, but before it was introduced the charity my colleague worked for had no system in place to support her to save for retirement.
When the charity did eventually offer pensions contributions, it was up to each employee to individually set up a private pension that the employer would pay into. This was not an easy thing to do – where do you start and who do you talk to for financial advice?
The whole idea seemed so incredibly daunting and far away.
Setting up a pensions scheme requires a certain set of skills and knowledge, as well as being proactive. My colleague admitted that she just kept putting it off.
When you’re in your 20s and you’re earning £20K or less, I don’t see how you would enter into a workplace pension when so much of your income is spent on things like rent.
My colleague told me another reason she still didn’t start saving for retirement until age 36 was because she was balancing competing priorities, like paying bills and making ends meet.
She also focused on saving for a deposit for a home – something that seemed much more urgent than saving for retirement, which was much further away on the horizon.
My colleague told me that how her parents saved for retirement influenced her own planning behaviour. Her parents had very few retirement savings and instead used their income to pay down their mortgage and then buy another property. The rental income from their second property is what provides them with their retirement income.
My colleague told me she thought this approach could be her backup plan for her retirement, regardless of whether or not this was a realistic possibility.
I know I’m already falling into the patterns and behaviours of what my parents did… I’m not looking at my pension as my go-to retirement income source because I started saving so late in life.
So, how do we help people overcome some of the barriers that get in the way of planning for their later lives? Our upcoming report will be a helpful contribution to thinking through how we develop solutions to enable more people to plan for the future.
**How much you should save into your pension depends on a number of factors (e.g. will you own your own home or will you be renting? What kind of standard of living do you hope to have? Will others be dependent on you?). A very rough rule of thumb is to take the age you started contributing towards your pension and halve it. Save this number as a percentage of your pre-tax salary (this includes your employer’s contribution) each year until you retire. I am happy to say after years of under-saving, I am much more confident that I am putting away the right amount!
For advice on pensions schemes and what they mean for you, check out The Pensions Advisory Service.
This article is part of our series on planning and preparing for later life.