How much will you need to escape retirement poverty?
Now is not the time to cut back on pension payments, no matter how young you are. Alessia Horwich reports
Sunday 31 May 2009
We dream of long, easy days in retirement, enjoying new-found freedom. But the illusion is shattered when we find we have to live on a pittance. A combined state and private pension amounts to an average monthly income of just £500, according to figures from Friends Provident, so if you don't want to live out your days in poverty, it's time to do something about it.
This dire situation is down to several factors. Few of us realise exactly how much we need in retirement to achieve a comfortable standard of living, nor how long it has to last. The big problem is that we are all living longer, so our pensions have to last longer. Average life expectancy following retirement at 65 is 18.5 years, so realistically a pension has to provide for two decades, if not longer, after your salary stops. However, despite having to last longer, the returns that most people's pensions are seeing at the moment are greatly reduced.
Pension pots have shrunk by as much as 30 per cent during the market turmoil hitting those close to retirement hardest. The recession also means that those paying into pensions may not have increased contributions or may have scaled back to lower their outgoings. Funds are therefore growing more slowly and reduced returns on smaller funds can only mean a lower annuity value and lower retirement income.
In order to draw a basic income in retirement, we need to accumulate a fund of at least £184,704, which would provide a monthly income of roughly £1,040 gross, according to Friends Provident. "When you retire you'll have fewer outgoings, but this is still not a comfortable standard of living," Martin Palmer, the head of corporate pensions marketing at Friends Provident says. "This would be added to a basic state pension but would only cover basic day to day living."
However, today the average annuity purchase is just £25,000, which will pay out roughly £125 per month. If you add maximum state benefit of around £90 per week, this is still only a monthly total of less than £500 gross to live on. "People generally need half to two thirds of pre-retirement income after they retire," says Andy Tully, a senior pensions policy manager for Standard Life. "If we live on average 25 years in retirement you need to multiply this amount by 25 for a ballpark figure. Working on a retirement income of £10,000 per year, for 25 years, that's at least £250,000. That's way beyond what the vast majority people have."
If you aren't already investing in a pension, the best place to start is with a stakeholder product, either as part of a company scheme or a personal stakeholder. Opting out of an occupational scheme which your employer contributes to is tantamount to saying no to tax relief and free money. If you don't have the option of an occupational scheme you can contribute towards a personal scheme.
The amount you should contribute depends on age. A good measure is to halve your age and invest that percentage of your salary. A 40-year-old should be investing 20 per cent of their salary, for example.
"The kind of contribution rates being put into schemes in the past would be anywhere between 9 to 15 per cent of your salary," says Dennis Hall, the managing director of Yellowtail Financial Planning. "Even at those rates there is a huge shortfall within large funded schemes. If you're doing it on your own and you're not putting in at least 7 to 10 per cent, you're going to be woefully short." In fact, to achieve that £184,704 fund, you will need to put away £140 per month for 35 years, £280 per month for 25 years and £650 per month for 15 years. And yet more than 40 per cent of us fail to make any pensions contributions at all.
This is for a myriad of reasons. Attitudes towards saving and finance have changed and are today much more short-term orientated. Before the latest recession hit, many people were living on credit and not worrying about how they were going to pay it back, experts suggest. Although the recession has brought personal finance much more into focus, it has not done much to change attitudes towards pensions. "People should be more responsible now, but are increasingly focused on providing for just the next year or two," says Mr Palmer. "As a result, their pension gets forgotten."
There is also a negative stigma attached to pensions, following a string of corporate pension fund scandals and the fact that pensions are about the end of our lives – something most of us would rather not think about.
And pensions are far from straightforward. Many people shy away from any sort of investment, Mr Palmer adds, even where the decisions are made for you, and few really grasp how risk works. Although investing in a pension does necessitate some risk, it is smoothed by continual investment. By putting in a little each month, you are never solely investing at the very top or the very bottom of the market, giving you less exposure to market ups and downs. In fact, now is one of the best times to pile money into a pension, buying while the market is low and investment units are cheap.
A pension is a long-term investment and although the market may go up and down in the short-term, the long-term trend is growth, ensuring a good return. But most pension specialists admit that not being able to touch such a significant amount of money for a long time does make people nervous.
The key to saving for later life is to start early. Once you have accumulated a good amount you can start to look at diversifying your portfolio. Those with a good 20 years to go before retirement should be looking to invest more in shares and real assets as they can afford to take more risk. Those who do not start early will not be able to maximise their returns from this type of investment, as once you are closer (within five or 10 years) to retirement you should switch to safer assets with lower returns. Mr Palmer says, "It's no good waiting until your 50s to contribute. You need to start much earlier which will make it much easier and give you a decent chance to give yourself a good income."
Today, many rely on working longer to provide for themselves in later life. Over 40 per cent of 46- to 65-year-olds intend on working past retirement. This is a good strategy, many agree, and could be the status quo for most of us in future. "If you're going to contribute to a pension for 30 years and then be in retirement for another 30, the sums look scary," says Mr Tully. "But just five more years even in part-time work can make a big difference." The key is the just how long you defer for. If you don't draw any money from a pension you reduce the time over which you have to spread it and the fund can potentially increase as a result of the extra time it is invested.
However relying solely on working after retirement age can be risky, as you simply do not know how healthy you'll be at that stage and whether you will be able to work. One thing is for sure, it's time to start saving regardless of how old you are.
10 tips for taking out a personal loan
Simon Read: Frozen in time - the expat British pensioners who deserve a better deal
Simon Read: If this is BT's idea of 'simple', beware if it gets complicated
Donald MacInnes: My wasted hours in the retail deserts of Dixons-Carphone
Pension firms must ask consumers more questions, says City Watchdog
- 1 King Salman: Just five days in, Saudi Arabia's new king has already overseen a beheading
- 2 The BBC has just done more to eradicate ‘terrorism’ than all our wars since 9/11
- 4 Presidential optical illusion offers clues to how brain processes faces
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
French court convicts three over homophobic tweets, in case hailed as a 'significant victory' by LGBT rights campaigners
Greece elections: Syriza and EU on collision course after election win for left-wing party
British Muslim school children suffering a backlash of abuse following Paris attacks
British grandmother Lindsay Sandiford faces execution by firing squad in Indonesia
Louise Mensch says 'F**K YOU' in explosive tweets about David Cameron, Saudi Embassy and the Queen over King Abdullah tributes
iJobs Money & Business
£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...
£16500 - £16640 per annum: Recruitment Genius: This fast growing Finance compa...
£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...
£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...
Day In a Page
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village