A recent survey by Scottish Widows found that nearly 90% of 22 to 29-year-olds lacked confidence in their retirement savings.
Nearly half of those surveyed were not saving enough for their retirement. Certain ‘behavioural nudges’ could significantly increase retirement funds. For those under 30, pension pots at retirement could increase by as much as £142,000.
Saving for retirement is crucial at any age and it isn’t reliant on behavioural psychology and nudge theory – although that can help.
There are several small steps you can take to increase your pension contributions now. The sooner you make changes, the bigger the benefit in retirement could be.
Behavioural psychology could ‘nudge’ up pension savings among the young
Scottish Widows found that pension savings could be increased among the under-thirties by referring to contributions as ‘investments’ rather than ‘savings.’ This simple word change resulted in a 34% increase in the amount those surveyed said they would be willing to put aside.
Scottish Widows also asked participants where they saw themselves in the future.
Telling savers that a ‘15% contribution would allow for a comfortable retirement’ doubled the number who would recommend increasing contributions from the current auto-enrolment minimum of 8% up to 15%.
The study used behavioural psychology – nudge theory and positive reinforcement. To get savers thinking about their future selves, they built an association between pension investment now, and a comfortable lifestyle later in life.
The positive connotations associated with ‘investment’ rather than ‘saving’ could make a massive difference to those starting to save. But what if your retirement is closer?
Three simple ways to save more for your retirement
1. Paying your future self first
Paying your future self first is a simple budgeting tool that means putting money aside for savings and investments before you start calculating your household budget.
Contribute as much of your disposable income as you can into your pension (or savings and investment products). You’ll build toward a comfortable retirement without leaving yourself short in the present.
Regularly review the amounts you put aside and increase your contribution when other regular expenses end. If you have a mortgage or you are paying a child’s school fees, redirect these payments into your pension as soon as your child leaves education and the regular expense ends.
You might also put additional money aside if you receive a work bonus or pay rise. Paying your future self first from ‘extra’ income means that you won’t have the chance to miss it.
This a great way to increase your pension contributions without making big financial changes. And remember that even a small rise in your contribution could make a big difference in the long term.
2. Maximise workplace contributions
The minimum auto-enrolment contribution for the 2020/21 tax year is 8%. That means that for every 5% you contribute to your workplace pension, your employer contributes 3%.
As a 50-year-old male earning £55,000 a year and paying the minimum employee contribution of 5%, you would receive tax relief of £36.47 per month and £109.40 per month as an employer contribution. That’s over £1,300 per year.
You can contribute more if you can afford to and some employers might increase their contribution in line with yours. Maximising your workplace contributions could make a big difference at retirement.
3. Make the most of your Annual Allowance
You receive tax relief on your pension contributions up to the Annual Allowance so make the most of it. For the 2020/21 tax year, you can contribute up to £40,000 (or 100% of your pensionable earnings) into your pensions across all schemes.
You can usually carry over any unused allowance from the last three years too, so check your contribution history to see if you have more allowance you can use, and sufficient pensionable earnings to do so.
You’ll need to be aware of the Lifetime Allowance (LTA). This is a limit on the pension funds you can withdraw in your lifetime, and a charge applies if you exceed this limit. It rises in line with the Consumer Prices Index and for 2020/21 it is £1,073,100. The LTA will rise to £1,078,900 in 2021/22.
Remember that different allowances might apply depending on your salary and whether you have accessed any Defined Contribution pension benefits. Speak to us if you’re unsure which allowance applies to you.
Get in touch
You don’t need to be an expert in behavioural psychology to understand that your pension contributions are an investment in your future. We can help you make the most of that investment.
Work with us to put a financial plan in place and you’ll be able to live the life you want now while putting enough aside to make your retirement dreams a reality.
Please get in touch if you have any questions about your current financial plans or you would like to book in for your regular review.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator