It’s not sexy, there’s no shiny key to hand over, there isn’t even the smug sense of a future blow out thanks to a nice fat savings account.
Pensions, it’s fair to say, have always struggled for PR.
Lately though it has felt like it hasn’t really mattered as millions of us got caught up in the workplace pension. Catapulted towards retirement savings through a tempting combo of cash from our own salaries and our employers’ coffers, the numbers of people who have been saving enough has happily ticked up since 2012.
The problem is, with the roll-out near completion the numbers have stalled at just over half the population. And even for them, there are issues.
“There is an inherent conflict in UK pension policy at present,” says Tom McPhail, head of policy for Hargreaves Lansdown. “We’ve been using auto-enrolment to bring millions of people into pensions by default.
“However, having done that, it is now essential to help investors engage with their retirement savings and to make good decisions about how to make the most of the money they’re putting aside for retirement. The more engaged people are and the more they understand pensions, the more likely they are to trust them and to make good long-term retirement decisions.”
Don’t save, can’t save
The rest of us, it seems, are destined to stop work after an increasingly long labouring life, start struggling for money and never stop.
In fact, despite huge campaigns and ground-breaking legislation designed to protect us from a future on the breadline, nine million people, including those who remain entirely unsupported by current legislation, such as the self-employed, still fail to save anything at all for retirement, according to the latest figures from Scottish Widows, released to mark Pension Awareness Day on Friday.
The result, surviving on the state pension, will mean living off a maximum of £22 a day under today’s rules. And that’s if the state pension exists at all by the time today’s youngest workers retire, warns Peter Bradshaw, national accounts director for Selectapension.
“Many people, especially millennials, need to understand the true cost of retirement and make adequate provision,” he says.
“With the state pension currently paying out £691.38 at most per month, this is unlikely to cover everyday living expenses for most and shouldn’t be relied upon solely. Clothing, phone, broadband and TV average at £171.10 per month and when you factor in rent, utilities, insurance, food, it doesn’t leave much for days out or travel.”
Never too young
“Rents creeping up, inflation increasing and, particularly for new students, the rising interest rate on student loans makes even meeting immediate financial priorities a challenge, let alone intangible retirement saving,” says Rose St Louis, savings specialist at Zurich UK.
“It doesn’t always have to be a compromise, however, and income to see through retirement years can be built up even from childhood through tax efficient vehicles such as JISAs. Transfer of wealth between generations is also an option, and £3,000 can be gifted each year without incurring inheritance tax, so parents and grandparents can consider this within their own financial plans. Of course, it’s equally important this isn’t a strategy that’s relied upon, and education around how individuals, whatever their age, can start putting money aside, is crucial.”
There’s no doubt the retirement savings game is changing, especially for those whose other financial goals have been delayed. With the average first-time buyer now aged anywhere from 31 to 37, depending on whose research you trust, and longer borrowing deals increasing in response to rising property prices, it’s clear that many pensioners of the future will need to be able to cover mortgage payments well into retirement.
In fact, about a quarter of those retiring today will do so with “unmanageable” debt levels of more than £38,000 on average, according to a study by Prudential earlier this year.
Even if you don’t expect to still be paying off borrowing after you finish work, the industry rule of thumb is that workers need to be setting aside 12 per cent of their salary if they are to have any hope of a comparable standard of living when they stop work (pegged at around 70 per cent of current income).
But with the population ageing, think thank International Longevity Centre UK has warned that younger adults will need to put away 18 per cent of their income to get by.
Not only that, but the figure rises to 20 per cent if they want to bask in the same level of income that today’s retirees enjoy as a result of disappearing final salary pension schemes, wage stagnation and sluggish investment returns.
How to build a bigger pension pot
Darius McDermott, managing director of Chelsea Financial Services, offers some top tips for retirement saving:
1. Start investing early
Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn’t pays it.” Starting earlier gives you a huge advantage; no matter how little you have to invest, it is still worth doing.
For example, if an investor invests £1 a day for 70 years and achieves an annual rate of return of 7 per cent, with all income being reinvested and interest being compounded monthly, the resulting pot of money is worth £685,245*. If the same investor wanted to make the same £685,245 over a 50-year period, under the same conditions, he would have had to invest more than £4 a day.
2. Don’t opt out
Remember to actually save into your pension on a regular basis, especially if it means your employer will contribute more too. And remember to increase your contributions as your wages increase. It is all well and good picking funds that perform well, but the best way to make a pot grow is to add money to it. The amount you save depends entirely on what you can afford, but the more you save now, the more you will have in retirement.
3. Make regular checks
Monitoring your pension is hugely important, particularly when investing in funds. By monitoring where you are invested you can ensure that you are on track to meet your retirement goal. Overtime you may also want to change the look of your portfolio. Someone who has a long time until they retire may be willing to take more risks, as their funds will have longer to hopefully outperform, despite any short-term dips. Someone who is due to retire in the next five to 10 years may want to be in less volatile funds, so that their savings have less chance of being damaged by any short-term dips in markets.
It is unlikely that you will have only one employer throughout your lifetime, however, so it could be tricky to keep track of the different policies you hold. Consolidating all your pensions in one place can make it a lot easier to keep an eye on charges, but also where your money is invested. Remember to check that you won’t lose any guarantees or benefits by transferring, and always check if there are transfer out charges. The Government offers a free pension tracing service.
5. Reclaim missed tax relief
All UK residents under 75 receive a minimum of 20 per cent tax relief when they contribute to a pension. This is usually automatically reclaimed and added to your investment. For example, if you were to invest £800 into your pension, £200 would be added by the Government, making your total contribution £1,000 for that tax year. However, if you are a higher-rate or additional-rate tax payer, you can claim the extra back through your tax return. Say you pay 40 per cent tax, the extra 20 per cent can be reclaimed, meaning that your £1,000 contribution is now costing you only £600.
Many people are missing out on these savings. If you are one of those people, don’t worry. You can write to your local tax office up to four years after the year you contributed to reclaim the missed tax relief. You will usually receive a cheque, or have your next tax bill reduced.
6. Keep paying in
Just because you have retired does not mean you have to stop contributing to your pension completely. Up to the age of 75 you can continue to receive tax relief on contributions, depending on your circumstances.
7. Save for a family member
The annual allowance for an individual is based on how much they have earned in that tax year, but did you know that someone who is a non-earner can also save into a pension? The amount a person will receive as a state pension is entirely based on their national insurance contributions through their working life. But what about those individuals that take time off to raise a family? If your spouse has done so, why not save into a personal pension for them, so they are not disadvantaged in retirement?
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