Pensions - Articles - Budget impact on pensions - JP Morgan comments

 Savers should treat the Budget’s stepped increase in tax free allowances as an opportunity to increase their pension contributions. The best time to increase contributions to savings is when you received a pay rise and this increase in tax free allowances should be treated in the same way. According to the Chancellor, by 2017 an individual could be £900 a year better off when the tax free allowance moves to £11,000. If invested and assuming a 5% per annum investment return over 20 years1 that could amount to over £32,000 in additional savings for retirement.

 This is a consideration savers should take particularly seriously. The average defined contribution pot size is £35,6002, meaning a median earner has less than a 50:50 chance of achieving an adequate income at retirement from state and private pensions if they don’t contribute more than the minimum required by automatic enrolment, even taking into consideration current plans for auto escalation.

 In addition to this, our analysis3 has found that the average saver will contribute roughly 7% of their salary to their DC pension plan; and nearly a quarter of these members (22%) may change their contribution rate in any given year. Should they choose to contribute just £2,000 less a year, it is the equivalent of a £165,000 shortfall in retirement (this assumes contributions over a lifetime of work from 22 to 65 yrs).

 There is a ‘pensions crisis’ forming in the UK due to this significant savings gap. Today’s budget has placed pensions at the forefront of peoples’ mind. This further increase in income tax threshold will hopefully act as a catalyst to get people saving more for their retirement.