How can you be sure that you are currently saving enough to achieve the pension income you want… and, if you are running short, how much extra should you be saving? By Tony Watts OBE
A regular item in the financial pages of our newspapers – and sometimes on the front pages – is that we are not (as a nation) saving enough money to ensure a comfortable retirement.
The latest coverage is new research by the London Institute of Banking & Finance and Seven Investment Management, which shows that only 53% of Britain’s over-50s currently feel well prepared for retirement.
And, of course, the first step to being prepared for retirement is saving enough money before you reach that point…but just how much IS enough?
Everyone’s notion of “comfortable” will vary, but the standard figure commonly applied is £26,000 a year.
Many of us rely on having a State Pension as part of that mix; and, if you’ve tucked away your 35 years of NI contributions, that will give you £168.60 a week (£8,767.20 a year) at current rates.
So still a way to go! To cover the £17,000 shortfall would require a private pension pot of some £370,000 (if you assume the usual measure of a 5% yield).
Yet, when people are asked how much their pot will need to be to achieve that, the average figure given is just £200,915 – a smidge over half of what is actually required. Many of us forget how long that pot is going to have to last!
And when you drill down to what the average person DOES have in their pension pot, it’s smaller again: those aged between 45 and 54 currently have an average pension pot worth just £71,342. There is also a big gender gap: by age 50, women have saved an average of £56,000, exactly half the £112,000 average put aside by men.
Will auto enrolment make a difference?
The slightly better news is that things should (theoretically) get better for those in the younger decades as the impact of auto enrolment takes hold. Before that was introduced, just 47% of UK employees were in a company pension scheme; now 73% are.
And while the initial contributions were really very minimal – just 2% of a worker’s qualifying earnings, that has now gone up to 5% – and rises again to 8% in 2019.
So let’s see if that 8% will be enough…
Based on a current salary of £30,000 pa, with your pay and contributions rising in value by 2.5% pa over 40 years and an assumed net investment return of 5% pa you would have £440,000 in the pot by the time you retire. And while that sounds good, you now need to adjust it to current values: £165,000.
That means you’d need to be earning a lot more than £30,000 to reach your target if you are just making an 8% contribution (with employers contributing 3% of that). And it also assumes you are young enough to put a further 40 years of savings away…
Of course, there are lots of variables to factor in, and pensions experts recommend saving anything between 12% and 20% of your salary, depending on how your investments perform over the span of your working life.
Why the big gap between 12 and 20%? Increase the rate of return from 5% to 7% p.a. then the amount you put away drops from 21% to 12.8% of gross salary. A lot will depend then on how your pension fund fares…
Another popular calibrator is to halve the age at which you start your pension and put this percentage of your pre-tax salary aside each year until you retire and include your employer’s contribution in that percentage.
Could you save more than you are already doing?
You can always ask your employer to increase their contributions… and no, that’s not as wildly optimistic as it might seem. Their additional contributions are free of National Insurance Contributions (NIC), so (if they are feeling generous) they can pass on their NIC saving as an extra contribution.
If your boss is you, in common with many self-employed people you may well have funnelled your available funds over the years into your business… or just staying afloat. Which explains why nearly half of self-employed workers between the ages of 35 and 54 have no pension savings at all, and neither do around 30% of self-employed people over 55.
But the same measures apply: unless you are confident that your business really will deliver you a handsome pension pot when the time comes to put your feet up, you do need to start putting money away.
There is an almost ubiquitous unwillingness amongst the general population to put off finding out if they really are covered for retirement, so if that sounds like you perhaps now is the time to do a few preliminary checks!
You can rapidly discover how your State Pension is faring by going onto the DWP website and getting a pension review. Equally, you can ask your current provider how the sums for your pension fund are stacking up. And if you think you may have a pension from a previous employer, then the Pension Tracing Service can help there too.
With all this info to hand, you can then feed the figures into the RetireEasy LifePlan and find out in minutes how much you will be able to draw out each year in retirement, assuming your current plans stay on track. You can also build in some different scenarios – such as higher or lower yields, or staying in work for a few years longer.
If the sums don’t add up, consider taking professional advice on how much you need to put away – and where – to achieve a secure and comfortable retirement.
And for couples…
All the above will also need adjusting if there are two of you with State and/or private pensions to take into account. Fortunately, the RetireEasy LifePlan Couples version allows you to make all those adjustments.