How might working from home affect retirement?
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
Prior to COVID-19 in 2020, working from home was gaining popularity in the UK. In 1981, only 1.5% reported that their role was mostly remote, but by 2019 this stood at 4.9%. Following the Government’s orders to work from home during the pandemic lockdown, the figure skyrocketed to 43.1% by April 2020. Today, 90% of these people stated they wished to keep working from home – at least in some form – regardless of what happens with COVID-19.
This is understandable in many ways. Working from home allows you to work more at your own pace, surrounded by family and familiar comforts. There are also savings in time and money if you no longer need to commute. However, this trend does raise questions. What is the potential for these people to get promoted and increase earnings if they are no longer as visible in the office? What might remote working mean for your ability to save for retirement?
In this article, our financial planning team in Grantham, Lincolnshire takes a closer look at this latter question in particular. We hope you find this content helpful. If you want to discuss your own financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
The “pay potential” question
In the UK, most people save for retirement via two main channels. The first is through the State Pension, where your income will be based on your National Insurance (NI) contributions; usually built up automatically via your payslip (under the PAYE system). The second is through your workplace pension. Here, in 2021-22 you are required to personally contribute at least 5% of your salary under the auto enrolment rules. Your employer must put in a minimum of 3%.
Therefore, the more you earn, the more both you and your employer will typically put into your pension. Yet what if working from home inhibits your earning growth potential? Here, the picture is still not clear. On the one hand, not commuting to work has enabled some people to save up to £240 per month during lockdown (nearly £3,000 each year). If this amount was put directly in a pension over, say, 30 years, then this would likely amount to significant compound growth.
However, some economists have expressed concern that working from home could incentivise employers to pay workers less. Lower work-related outgoings could justify offering new roles to recruitment candidates with lower salaries. Lower salaries, however, mean lower pension contributions under auto enrolment – unless the employee decides to contribute a greater percentage.
Employed people – take advantage
Under UK law, current employees cannot be forced by employers onto a lower salary without the former’s consent. As such, if you currently find yourself working mostly (or completely) from home under your existing contract – and also making savings due to less/no commuting – then consider how to deploy this extra income wisely. What could you do with an extra £240 each month? Of course, you could spend it on a lavish holiday (tempting after all those months stuck at home!). Or could some of it go towards giving your future retirement income a boost?
There are other savings often involved with no commute. There is no longer the temptation to pick up a coffee or morning snack for the train. Your car-related costs may go down as you use your vehicle less often, resulting in lower repair and servicing costs. You may even need fewer smart clothes for in-person meetings – again, another potential saving. Consider taking time to calculate how much you might be saving compared to before the COVID-19 lockdowns, and whether extra money could be put towards your long-term future.
Everyone – plan early
It is not yet clear whether UK wages – and pension contributions – may be affected by increased home working. Regardless, it is important to plan for retirement as early as possible. Those in their 20s and 30s, for instance, have a huge amount of time on their side to take advantage of compound interest and grow their retirement fund.
Consider how much a £10,000 pension pot could grow at 6% over various time periods. Over 10 years, it could grow to £18,000. By year 20, it will likely be closer to £32,000. By year 30 it could be over £57,000, and just ten years later it could be over £102,000. The earlier you start to plan for retirement, in short, the more pressure this takes off your income later – potentially letting you enjoy a greater percentage of your salary.
For those in their 40s and above, you can still put strong plans in place to move towards your retirement goals, if you are yet to do so. Perhaps the new situation you find yourself in – working from home and saving on the commute – is an opportunity to make up for some lost time?
Conclusion & invitation
If you are interested in discussing your own financial plan or protection strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585