Step 3: should I think about saving more, or starting to save?

Whether you have been automatically enrolled into a workplace pension or not, experts agree that most people are not saving enough for their pension. The State Pension is not guaranteed to keep up with living standards. The number of people covered by good occupational schemes is falling even though the number who belong to a workplace pension has increased sharply as a result of automatic enrolment. Large numbers of people at work today are therefore likely to suffer big falls in their living standards when they retire. They will be either dependent on means-tested benefits or be only just above the threshold.

Of course, it’s easy for experts to say that people should save more, but that can be hard when you’re faced with housing costs, student loans, the costs of childcare, commuting and all the other expense of modern life.

But the experts are right to say that the longer you leave it the harder it is to build up a decent pension, and the longer you may have to work before you can afford to retire.

But don’t forget any money you tie up in a pension is precisely that – tied up. You should only put extra money into a pension if you already have some 'rainy day' emergency savings. There are ways of saving with similar tax advantages to saving through a pension, and you may be better off making at least some of your savings for retirement this way.

The hardest issue for those thinking about saving for a pension is the effect it will have on means-tested benefits – such as Pension Credit – in retirement. Governments often change means-tested benefits so even if you look at what is available today, there is no guarantee (or even much likelihood) that the same benefits will be available when you retire, particularly if you are relatively young today.

Clearly, if you can afford to save a lot this will lift you well above means-testing. If you can only afford to save a very small amount and think it unlikely that you will ever be able to afford more, then it might make more sense for you to save in ways other than a pension.

But for the vast majority that are not at these extremes, particularly those with below-average earnings but not on the poverty line, this is a difficult issue.

The arguments for saving are that:

  • it gives you your own pension that is not dependent on the generosity of future governments;
  • you will be better off, as it is unlikely that you will lose all your extra personal pension through a cut in your means-tested benefits;
  • some people are uncomfortable claiming means-tested benefits (though we don't think they should be!); and
  • even if you can only afford to save a little today, that could grow if well invested by the time you retire and you may be able to save more when you are older and perhaps have a better paid job.

The arguments against saving are:

  • unless you can save enough to lift you above any possible future means-testing limit, your additional private pension could significantly reduce your means-tested benefits; and
  • this makes it more expensive for those who might be able to claim means-tested benefits to build up extra pension. Every extra £1 of pension will cost them more than it will for well-off people who know they will be above means-testing.

If you decide you do want to make extra pension savings then there are various ways of doing it. These are:

The GOV.UK website has a useful section on personal pensions. You will also find more details about all these pensions options in the Planning your pension section of workSMART.

Note: This content is provided as general background information and should not be taken as legal advice or financial advice for your particular situation. Make sure to get individual advice on your case from your union, a source on our free help page or an independent financial advisor before taking any action.