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The Auto Enrolment Pension: What you need to know

In April 2016, the auto enrolment pension came into play, below is a breakdown of what this means for you now and in the long run and what you can do to maximise your pension.

Posted by Rohan Shah, Tuesday May 17 2016

Blog image_Advice on new pension scheme 2016

In April 2016, the auto enrolment pension came into play, below is a breakdown of what this means for you now and in the long run and what you can do to maximise your pension.

The Basics

Up until April 2018 everybody that is enrolled in the pension scheme will make a total minimum contribution of 2%, with your employer making a minimum contribution of 1%.  Employers can choose to pay the full amount, if your employer decides to do this, you won’t have to pay anything.

This percentage is then set to increase to a total minimum personal contribution of 8% by April 2019, with a 3% employer minimum contribution.

What does this actually mean?

So let’s take the average London PR agency Account Manager salary of £33,000. If your employer was to pay 3% (the minimum employer contribution as of April 2019) this would put (£990) into your pension pot each year. You would then personally contribute 5% (£1650) bringing you up to the 8% total minimum contribution.

What does a £2640 pension contribution per year get you in the long run?

If you pay £2640 in to your pension over 40 years (25-65), you could be left with a final pension pot of £147,634.

This might sound like a lot, but this would actually only equate to pay out an average of £6,914 per year in your retirement.

So what can you do to boost your pension?

Save on tax and save for later:

  • Putting additional money into your pension each month actually means you pay less tax. All pension contributions are tax free, so by paying £100 in to your pension pot you would only feel £80 poorer.
  • For higher rate taxpayers, this falls even further to effectively £60 or £55.

Save sooner rather than later:

  • Someone who starts saving at the age of 21 and then stops at 30 will end up with a bigger pension pot than a saver who starts at 30 and puts money aside for the next 40 years until retiring at 70.
  • Reinvested compound interest means that by putting £2,500 a year into a pension from 21 till 30 at a 7pc interest rate will leave your pension pot £19,000 larger than someone who has invested the same sum from 31 to 70, even though they will have paid £75,000 less into their pension pot

What’s next? 

Start saving and accounting for compound interest today. After all one coffee today will be seven tomorrow.

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