How to maximise a pension (for low income earners)

Oli West

by , Team PensionBee

at PensionBee

18 Aug 2021 /  

Income jar with small coins and expense jar with several notes.

When you retire, a pension will provide you with an income. For it to be large enough to fund your retirement, you’ll need to pay into it years in advance, usually while you’re working. Pensions are great because the money you pay in is usually boosted by the government and/or your employer, and then it’s invested so that it grows over time. In other words, you should get back far more than you paid in.

Usually, it’s recommended to put as much money into your pension as possible. But if you’re earning a low income, you might worry whether you can really save enough to retire at all.

Although there isn’t a specific pension scheme for low income workers, the good news is that it’s possible to retire with enough to live off, even if you earn a low income throughout your working life. Plus, the State Pension is paid in addition to your own personal or workplace pensions.

So how do you retire with enough to live off? How much do you need to pay in? And what extra things could you do to get the most from your pension? Read on to learn about ways to maximise a pension for low income earners.

How much do you really need to pay into your pension?

Your pension will need to support you throughout your retirement. So if you retire at 67 and live until 85, it’ll need to last 18 years.

But your pension doesn’t have to cover this cost alone. If you work for at least 35 years, your National Insurance Contributions should entitle you to the full State Pension income of £9,339 a year (2021/22).

How much to cover the essentials?

According to a recent Which? survey, the average individual will need a retirement income of £13,000 to cover essential living costs such as groceries, housing and utilities. For a retired couple, this figure is £18,000 (£9,000 each).

Using our pension calculator and a few assumptions, we estimate:

  • a retired single person would need to pay in £60 a month from the age of 21 to earn £13,000 a year (including the full State Pension) from 67 to 85
  • a retired couple could each rely on their State Pensions of £9,339 to cover their essentials

However, an essential lifestyle is very basic. It requires shopping at the cheapest supermarkets, doesn’t include recreational purchases and it doesn’t include holidays. To afford a more ‘comfortable’ lifestyle, which does include these extras, Which? says single retirees would need a pension income of £19,000 a year and couples would need £26,000 a year (£13,000 each).

And while a retired couple may be able to afford the essentials relying on the State Pension alone, bear in mind that the State Pension could pay out less by the time you retire, or the age at which you receive it could keep rising. So paying into your own pension can mitigate this risk.

The age you start paying into your pension matters

The above examples rely on a person starting work at 21 and continuing to work until they retire at 67, paying into their pension each and every month. But what happens if you start working later in life?

To cover essential living costs of £13,000 a year (supported by the State Pension), you’d need to top up your pension by:

  • £60 a month from the age of 21 (including the full State Pension)
  • £85 a month from the age of 31 (including the full State Pension)
  • £200 a month from the age of 41 (including partial State Pension)
  • £300 a month from the age of 51 (including partial State Pension)

Notice how quickly the monthly pension contributions increase the longer you leave it before you start?

To get the most out of your money, you need to start paying into a pension as early as possible. This is a result of compounding - an effect where previous investment growth experiences further growth. So £100 that grows 5% every year would be worth £105 after one year, £110.25 after two years, and so on. After 30 years, it would grow not by £5, but £21.61.

Ways to boost your pension contributions while on a low income

Now we know how much to aim for, we can look at ways to boost your pension contributions.

1. Reduce your outgoings where possible

Getting started can be as simple as drawing a line down the middle of a piece of paper, and listing your monthly income on the left and your monthly outgoings on the right. Total them up, and you’ll see how much money you’ve got left over at the end of the month (which you could put into a pension).

You’ll also see exactly where you’re spending your money, so you can consider cutting costs.

A few ways of reducing your monthly outgoings includes:

  • shopping at cheaper supermarkets
  • buying cheaper foods (see Netmums’ budget meal planner)
  • switching utility suppliers
  • cancelling subscriptions you don’t use
  • finding a more competitive mobile phone or internet contract

Online switching services can make things like switching utilities quick and painless. And you can use the money saved to boost your pension contributions each month.

2. Make sure you’re enrolled in your workplace pension

If you’re over 22 and earn more than £10,000 a year from a single employer, you’ll be automatically enrolled into your employer’s workplace pension. This is called Auto-Enrolment. If you earn less than £10,000 you can still request to be enrolled, it just won’t happen automatically.

With Auto-Enrolment, your employer’s required to contribute at least 3% of your qualifying earnings into your pension, and you’re required to contribute 5%.

If you haven’t been auto-enrolled, or you’ve previously opted-out, you’re potentially missing out on ‘free’ money in the form of workplace contributions. Plus, for every £1 you pay in, the government will add 25p as a tax benefit (or more if you’re a higher earner)! You can request to be opted in simply by asking your employer (they can’t refuse, by law).

3. Consider working for a company that offers a generous pension

Each company has their own pension policy, which means they could be contributing anything from the required 3% to 10% of their employee’s salaries or more.

So the next time you look for a new job, make sure to ask about the pension employers offer. Even a 1% increase in contributions can make a noticeable difference to your future retirement income.

4. Set up a personal pension if you’re not working

If you’re not working, but you still have some money set aside, you could consider starting a personal pension.

Unlike a workplace pension, you won’t get an employer top up. But you’ll usually still get the 25% government top up, which means £1.25 will go into your pension for every £1 you contribute. So it’s still a better return than putting your money away in a bank account.

That said, remember that you can’t access the money you pay into your pension until you retire. So you’ll want to make sure you have an adequate emergency fund on-hand before paying into a pension.

5. Be weary of pension provider fees

Pensions are managed by pension providers, such as PensionBee, who charge an annual fee for their service. Other providers will often charge a range of fees for various things. The important thing to note is that the total amount of fees will vary depending on the provider and pension plan you choose.

If you’re looking around for a new pension, pay attention to fees. Our own research shows that even a 0.50% increase in fees can reduce a pension pot’s value by over £10,000.

For more, read, are high charges eroding the value of your pension?

6. Check if you’re eligible for extra help

You may also be eligible for some support from the government, for example housing benefit, income support, working tax credits, child tax credits and council tax reduction.

The basic amount of working tax credit is a maximum of £2,005 a year (2021/22), but the exact figure depends on your situation and income. Use the tax credits calculator on the government’s website to find out more.

For more information about benefits and tax credits, as well as help with managing debt, check out the Citizens Advice website or drop into your local Citizens Advice Bureau.

Also read, Will taking my pension affect my benefits?

7. Benefits for low income pensioners

If you’re already retired and are receiving a small pension, you may be entitled to benefits. A key one is Pension Credit, which tops up your pension if you receive less than £177.10 a week (£270.30 for couples) for 2021/22.

There are many other benefits available that could support your expenses, including:

  • Housing benefit
  • Winter fuel payment
  • TV licence discounts
  • Council tax discounts
  • Free prescriptions
  • Free or discounted travel passes

8. Consolidate old pensions into one plan

If you’ve worked for previous employers, you might have paid into a pension while you were with them. When you leave a company, your pension continues to exist - your money will remain invested and you’ll continue to pay fees to your provider (these are usually taken directly from your pension).

There are a few downsides of having lots of old pensions:

  • They’re harder to keep track of, which increases the chance of forgetting about them entirely
  • It’s harder to estimate what they could be worth at retirement, which makes it harder to plan accordingly
  • You could be paying more than you need to in fees, which can reduce the amount of income you’ll get when you’re retired

To avoid these pitfalls, you can combine your old pensions into a new one. PensionBee can help you do this for free.

With PensionBee:

  • you’ll have just one place to check in on your pension, online or using the app
  • you can use calculators to estimate how much you’ll receive in retirement
  • you can adjust your contributions easily, to match your financial situation
  • you’ll pay just one simple fee of between 0.50% and 0.95% depending on your plan

To combine your old pensions, sign up to PensionBee today.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Are you saving for your retirement?

Sign up to PensionBee and we’ll combine your old pensions into a new plan that you can manage online.

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