Am I saving enough in my pension for a comfortable retirement?
Oh, pensions – BORING!! Not anymore. Didn’t you get the memo: pensions are the new black.
Well, maybe not. But, they are incredibly important, whatever your age. Am I saving enough for my pension? Chances are, probably not.
If you haven’t already, then you really should start thinking seriously about your pension. Like, NOW!
Bad news, you’re probably not saving enough in your pension
According to the 2011 Scottish Widows pension report, 49% of the UK workforce are not saving enough for retirement.
Amazingly, the ONS also estimates that two-thirds of people in Britain are saving no money AT ALL in a private pension.
The current state pension in the UK is £110.15 per week in 2013/14. You will only receive this only if you have worked and paid national insurance for 30 years.
This equates to £5,728 per year. THIS IS NOT ENOUGH. The following stats are taken from a recent report:
- For the average pensioner, the annual energy bill is around £920
- Transport & motoring costs amount to £1,217
- The average grocery bill is £1,409
- Housing rent, council tax and housing maintenance amounts to £1,216
- Household goods and services are £697
Just these categories total £5,459.
Right, so you now have £269, or £22 per month, to spend on what you dream about in retirement (sipping champagne with the captain on cruises, relaxing on white sand beaches, buying epic presents for your grandchildren and a weekly trip to the bowls!!).
IT JUST ISN’T ENOUGH!
What should I do?
Firstly, listen to Paul Lewis as a summary to explain why it’s so important:
Then, you need to calculate how much you need to enjoy the lifestyle that you want to have in retirement.
Calculate your expenditure in retirement
To calculate this amount, there are some great pension calculators out there. The pension calculator at The Money Principle is one of my favorites.
Whatever answer you reach, add another 10-20% as you would have always underestimated and forgotten some form of expenditure.
The result of this, and most other, calculators will provide an amount which you need to save every month in your pension.
What help is there?
Matched pension schemes are a great way to increase the amount you can save towards retirement. Effectively, they are just a pay rise, and everyone loves a pay-rise, right?
The amount that employers will contribute will vary by employer and by your position in the company, but according to a recent report, the average FTSE 100 employer currently offers 10% in matched contribution.
With the changes in the auto-enrollment (automatically opting people in to pensions – which is an awesome plan by the way), the average is likely to increase over the next few years.
Let’s imagine that your employer matches 6% of your pension contribution. For the average employee in the UK, this will equate to a £1,500 per year pay rise! Result!
Oh, and let’s not forget about the tax benefits!
You contribute to your pension before the tax man takes their cut. Therefore, for the standard 20% tax payer, if you contribute £800 per year, you would have had to earn £1,000 normally to obtain that amount. Therefore, you are essentially getting another 20% from the government.
For higher rate income earners, this is 40%. For top rate, this is 45%.
Over time, your pension will (if invested wisely – see part II) then earn capital growth and dividends/interest, which is also protected from capital gains and income tax (like an ISA).
So, how much should I be saving?
People often cite the following rule:
“Divide your age by two and save this percentage of your salary each year”
So, a 30 year old, should be saving 15% of their salary towards their pension. A 50 year old, 25%.
Whilst this isn’t terrible advice, I would suggest two alternatives, the latter being better than the first:
- Save what the calculator above told you to save and add another 10-20%
- Save as much as you can (and then save even more!!)
Where does my money go?
All your pensions savings are essentially an investment which go into a big pot.
However, you need to manage this pot and this is an equally important aspect as saving in the first place.
Imagine the average Britain contributes 15% of their salary and this is matched with a 10% contribution from their employer, and they contribute this for 30 years.
- At an annual investment return of 3%, their retirement pot would be £298,334
- At an annual investment return of 6%, their retirement pot would be £503,224
This amount to a difference of over £200,000 difference which results from just a few percentage points difference.
This very important and complex issue and shall be addressed in Part II of this series. I am sure you can’t wait…!
Coming up to retirement age and need more help regarding pensions? Then check out Keys Retirement Solutions where you can use their free annuity calculator, free equity release calculator or speak directly with their specialists regarding your specific situation.