So you think £100,000 is a lot of cash...
A new scheme to encourage Britons to save more towards their pensions comes not a moment too soon
Sunday 09 July 2006
You probably wouldn't have trouble spending £100,000. Fast cars and foreign holidays would be yours for the taking.
But what looks like a huge sum is not so impressive when you consider what you might need for a comfortable retirement. Today, a pension pot of £100,000 saved throughout a working life would buy a 65-year-old non-smoker an annuity, or annual income, of £6,000 to £7,000 a year (or £580 a month), and that's before tax.
That rate applies only if the annuity is bought from Norwich Union, based on the latest figures from the Financial Services Authority. Its website allows consumers to compare "guide" prices on annuities (see the address below).
The same pension pot would be worth £521 a month at AXA and £590 at Legal & General.
And don't forget inflation: as the cost of living rises, a fixed monthly sum will buy less and less. To avoid this, you can take out an annuity that allows your retirement income to rise in line with inflation. However, at least initially, you'll have to accept a lower monthly pension for this safeguard. With Norwich Union, you'll start on £210 a month less than with a standard annuity (£370); at AXA £164 less (£357); at L&G £205 less (£385).
Of course, most people will receive a state pension. In this tax year, the full basic rate - dependent on your having worked for many years - is £84.25 per week. Those on low incomes can also get pension credits.
Knowing how much you need to live on in retirement - and therefore need to save - is now more important than ever. In the past, many workers belonged to final salary pension schemes, which guaranteed to pay out a percentage of their final wage. But many companies are now closing such schemes to new entrants and demanding higher contributions from all staff.
Replacing final salary pensions in many workplaces is the "defined contribution" (DC) scheme. This lets you build up a lump sum, tax-free, with help from the government and your employer (if you're lucky). When you are ready to retire, you trade in your pot of cash for an annuity.
The £100,000 example cited above pays an income that, for many, won't be enough to support their current standard of living. Yet it's much greater than the average private pension savings pot amassed by Britons: industry estimates of this vary from £25,000 to £32,000.
The proposed national pension savings scheme (NPSS) is in part a response to this savings gap. It would work like this: every time you join a company, you start saving into its pension scheme unless you specifically ask to be pulled out of it. While the NPSS would be no guarantee of a decent pension, it should kickstart long-term savings for many people, especially those who would never otherwise have put money aside.
There are plenty of financial advice websites to help give you an idea of how much you should be saving for your retirement. Insurer Standard Life last week launched its Retirement Planner webpage (see below), which lets you calculate what you need to save - and see by how much you're currently falling short.
As a general rule, independent financial advisers (IFAs) often suggest you save a percentage of your gross salary equal to half your age towards a pension. But Patrick Connolly of IFA Towry Law JS&P warns: "Rules of thumb tend to be dangerous since your circumstances, and salary, can change quickly."
Tom McPhail of IFA Har-greaves Lansdown, whose website includes a pension planner and annuity "supermarket", stresses that everybody saving into a DC fund and approaching retirement must shop around for an annuity. "To spend years building up a pension fund of tens of thousands of pounds, and then not bothering to get value for money out of it is crazy."
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