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If I offered you some free money, I’m pretty sure you’d take it, in fact I don’t know anyone who would turn it down. However, there’s a good chance you’ve already turned your nose up at some free cash, and you may not even know it.
Let me explain where you get this free money from and how you get your hands on it. It’s all to do with pensions (stay with me, I know they’re boring).
If you work for a company then, by law, they have to put you into their workplace pension if you earn over £10,000 a year and are aged over 22. This is known as ‘auto-enrolment’ as you are automatically enrolled into your workplace pension scheme and your employer will take money from your pay packet each month and pay it into your pension.
You have got the chance to opt out of the pension scheme but every three years you will be auto-enrolled back in and have to opt-out again (the government really wants you to save).
But it’s by making the decision to opt out that you also give up free money.
Under the auto-enrolment rules, once you’re in the pension you pay in a set amount of your wages - currently 1% - and your employer adds another 1%, and the government gives you a little top up as well (totalling 0.2%) in the form of tax relief.
If you agree to pay into a pension your employer has to pay in and the government will give you a reward for paying in too, but if you opt out your employer doesn’t have to put anything in and the government definitely won’t give you anything.
The government wants you to put some money away for your old age which is why it offers savings incentives.
And you’d be crazy to give up that free money from both your employer and the government. Let’s be honest, how much of a state pension are people in their 20s and 30s really going to get? And are we going to have to wait until we’re 80 to get it?
You have to start taking responsibility for your retirement because there’s a dwindling level of support to rely on from the government.
It might seem like a stretch on your wages putting away money each month but the money for your pension comes out before it hits your bank account so you soon adjust (a bit like your student loan, it’s already discounted before you get your wages).
Of course, if your payment into your pension means you genuinely can’t afford your bills then think about opting out but if you can afford to pay into a pension then you should do so.
At the moment the auto-enrolment contribution - the amount the government makes you pay into a pension - is low; in all honesty, saving 1% of your wages isn’t going to give you a retirement of cruises around the world. The government knows this and so has set out a plan to increase the amount you and your employer have to contribute.
By 2019, the contribution levels will be increased to 8%, made up of 4% employee contribution (what you put in), 3% employer contribution and another 1% of tax relief.
This is a much healthier level of contribution although arguably still too low (but that’s a discussion for another day). You may not like the idea of 4% of your wages being saved for you - especially if you don’t even want to put 1% in - but hopefully by the time the contributions tick up automatically you will have had a pay rise or will be in a better financial situation to cover the cost.
If you decide to opt out of your workplace pension when the contribution rates go up, then you’ll be giving up even more free money because your employer contribution and the government top up increase too.
I know that retirement seems like a long way off, and it probably is, but that’s a good thing. You have loads of time to save for it and if you start putting away 1% of your wages now, adjusting your finances to handle the inevitable creep up in contributions, and importantly staying in your workplace pension, it will pay off.
Just that one small change that will get you into the savings habit for life is the difference between a retirement spent enjoying yourself and one spent in poverty.
When you get to old age and you’re enjoying yourself, you’ll thank your younger self for claiming that free cash.