With more savers increasing their pension contributions beyond the minimum, it’s easy to see this as a positive step. However, as Ahmed Bawa, CEO of Rosemount Financial Solutions (IFA), explains, extra pension saving isn’t always the best use of spare income, and advisers play a key role in helping clients find the right balance between long-term goals and short-term needs.
We all know that household budgets are under pressure at the moment, so it’s striking that so many people are prioritising their long-term retirement planning. Recent research from Standard Life has revealed that almost a third (31%) of UK adults have chosen to increase their monthly pension contributions above the statutory minimum, while one in ten (10%) have made additional lump sum payments.
The benefits of such behaviour are clear. Standard Life’s analysis suggests that even modest increases in contributions can translate into tens of thousands of pounds more in retirement. A 2% increase, for example, could mean an extra £52,000 over the course of a working life. At a time when questions about the adequacy of pension provision continue to dominate, this is an encouraging development.
However, the decision to direct additional disposable income into a pension is not always straightforward. Advisers have a crucial role to play in helping clients assess whether this is the most effective use of their resources, or whether there are other priorities that may need attention first.
The auto-enrolment effect
The success of auto-enrolment in normalising pension saving should not be understated. Millions of people who may otherwise have reached retirement with little provision are now contributing regularly.
Yet the minimum level of contributions was never intended to be sufficient on its own. Policymakers and industry bodies have consistently warned that relying solely on the current minimum contribution levels will not secure a comfortable retirement.
For those able to do so, increasing contributions is certainly worth considering. It demonstrates a willingness to think about the future and highlights the potential impact of small, consistent changes. That extra £50 a month, for example, can add up to far more substantial sums by the time the client retires.
But this is only one part of the financial picture.
Pensions in context
Additional contributions, while positive, must be weighed against other considerations. For some clients, building or maintaining an emergency savings fund will be more immediately valuable. Others may not have adequate protection in place, leaving families vulnerable to the financial consequences of illness or loss of income.
Advisers understand that decisions should not be made in isolation. The suitability of directing funds towards a pension depends on the client’s wider financial circumstances. A balanced approach, ensuring short-term resilience as well as long-term growth, is often the more prudent path.
The adviser’s opportunity
The current climate presents advisers with an opportunity to engage with clients in a constructive way. Increased awareness of pensions, and a willingness to contribute more, provides a natural entry point to wider conversations about wider financial planning.
Rather than viewing these additional contributions purely as positive, advisers can broaden the discussion. Is the client adequately insured? Do they have sufficient liquidity to manage unexpected costs? Are there alternative vehicles – such as ISAs – that might better suit their goals?
These are the sorts of questions that ensure financial plans are not just well-intentioned, but genuinely effective.
Towards a holistic approach
Financial advice is most valuable when it takes the whole picture into account. Pension contributions are important, but they are only one strand of financial wellbeing. By ensuring that decisions about surplus income are made in the context of broader priorities, advisers can help clients avoid the risk of being overexposed in one area while underprepared in another.
The Standard Life research should be welcomed as evidence that attitudes towards retirement planning are shifting in the right direction. Yet it also underlines the importance of professional guidance. The role of the adviser is not simply to applaud additional saving, but to ensure that such decisions align with the client’s wider circumstances and long-term objectives. In doing so, advisers help clients strike the balance between preparing for the future and protecting the present – ensuring that every pound of surplus income is working as effectively as possible
By Ahmed Bawa, CEO, Rosemount Financial Solutions (IFA)
