Millions of people have been working from home since the pandemic forced many UK businesses to close their offices. But did you know that over 4.5 million people mostly worked from home before the pandemic, anyway? This trend has been increasing for more than 20 years, and it’s likely to continue.
So how could working from home affect your pension? Let’s find out.
Weighing up the costs
One of the joys of working from home is the lack of commute, which can be expensive. And cities in the UK have some of the most expensive transport in the world. In fact, London takes the top spot and is more than double the cost of other major UK cities.
| City | Monthly travel pass cost | Annual cost |
|---|---|---|
| London | £160 | £1,920 |
| Birmingham | £65 | £780 |
| Manchester | £73 | £876 |
| Edinburgh | £56 | £672 |
| Cardiff | £53 | £636 |
| Belfast | £60 | £720 |
Lunch is another expense that many office-based workers have to absorb. One of the most popular lunch destinations is Pret A Manger, where a Chicken Caesar & Bacon sandwich, an apple and a latte could set you back around £8.60. But those working from home could make all of this with shop-bought ingredients for around £2 - a £6.60 saving.
Those working from home will see one cost rise, however. Work from home employees estimate they’re spending an extra £40 a month to heat their home and boil their kettles, according to one survey.
| Office worker’s monthly cost | Work from home monthly cost | |
|---|---|---|
| Travel | £160 | £0 |
| Lunch | £172 | £40 |
| Home electricity | £0 | £40 |
So how do the numbers stack up? When the above costs are factored in, the average Londoner could save £292 each month by working from home. That’s around £3,000 a year, including a month’s holiday leave. Those in Edinburgh would save around £2,000 a year.
Investing your work-from-home savings into a pension
Whether you work from home or commute to the office, your workplace pension scheme will work the same way - you and your employer will make a contribution, and the government will top it up.
The key difference for those working from home is that they have the option of investing the money they save on commuting and lunch into their pension.
So let’s see what a Londoner’s pension could be worth if they invested their £3,000 a year work-from-home savings. For simplicity, we’ll break it down by month and won’t include employer contributions because that will likely stay the same.
- They contribute their £250 a month savings into their pension
- The government tops it up by 25%
- A total of £313 goes into their pension
- Their pension grows 4% each year for 30 years
- Their pension could be worth an extra £210,319
And someone working from home in Edinburgh?
- They contribute their £182 a month savings into their pension
- The government tops it up by 25%
- A total of £227 goes into their pension
- Their pension grows 4% each year for 30 years
- Their pension could be worth an extra £152,775
And one more, excluding lunch (because not every office worker eats out every day).
- A Londoner contributes their £131 a month savings into their pension
- The government tops it up by 25%
- A total of £163 goes into their pension
- Their pension grows 4% each year for 30 years
- Their pension could be worth an extra £109,702
Now, the average person in the UK retires with a pension pot worth £61,897. So it seems that wherever you live, working from home could potentially double your pension pot at retirement. And the difference is stark.
Withdrawing £8,000 a year from the average £61,897 pension pot could sustain you for nine years. But withdrawing the same amount from a £171,599 pension pot (average + Londoner excluding lunch example) could last well past your 100th birthday.
Is it worth working from home to boost your pension?
There’s little doubt that for some people, working from home could free up enough money to significantly boost their retirement savings. But is working away from the office really worth it?
Working from home suits some people really well. Some people find it much easier to concentrate away from the distraction of the office, while some parents appreciate spending more time at home with their children. That could even help reduce childcare costs, freeing up more money to put into their pension.
But others miss the buzz of an office environment and the collaboration opportunities that are easier to come by. And less in-person social contact can negatively impact some people’s mental health.
Working from home isn’t for everyone, but there are clear financial benefits for those who do. So it’s worth considering your own needs first before exploring the possible financial gains. And if you’re unsure, you could consider working from home for just a few days a week, as a more workable middle-ground between the two.
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.
