In line with our risk management framework, today we published our Q4 2019 performance update.
Your pension: how much is enough?
In personal finance, there are few greater challenges than stashing away enough money to last for the duration of one's retirement. Partly because the current economic climate hardly lends itself to saving substantial amounts of money, but also because very few Brits have a clear idea of how much 'enough' is.
One organisation who are better placed than most to establish this is the Pension and Lifetime Savings Association (PLSA), who recently published an alarming study which found that over 30 million members of the present workforce (more than 90 per cent) will be unable to fund the retirement lifestyle they envision. Furthermore, the survey found that 80 per cent of respondents had little or no idea how much they should be putting towards their nest egg.
And while their report acknowledges the impact of auto-enrolment, it illustrates that the present statutory minimum contribution levels (5 per cent of income: 3 per cent contributed by the employee and 2 per cent by the employer) of this scheme are insufficient. In fact, even when the threshold rises to 8 per cent (shared evenly between employer and employee) next spring, such an amount would still leave 50 per cent of savers falling short of the target replacement rate (two-thirds of final income as a retirement income). Worryingly, this figure drops dramatically to just three per cent for those who do not have a final salary pension.
Why are Brits struggling to save enough?
Central to this conundrum is the fact that retirement saving is a moving target. Indicative of this is the history of the state pension age, something which many people associate as being a guideline for when to down tools. When it was first introduced in 1908, the state pension age was 70 (and only men were eligible), yet life expectancy at that time in the UK was just 47.
Fast forward to the implementation of the 1995 Pensions Act, when the state pension age for men was 65 (women were entitled to this benefit from the age of 60). At that time, our country's life expectancy was 74 for men, and 77 for women. Yet as things stand, the state pension age is set to increase to just 67 by 2030, while life expectancy will have risen to 85.9 and 87.6 for men and women respectively by that time.
Again, the state pension is separate from a private or workplace pension, but it nevertheless underlines the commonly-held perception that longer life expectancies will translate into an extension of our retirement. This, of course, requires us to build a significantly higher savings pot, but there are a number of headwinds faced by younger and middle-aged generations.
The disappearance of final salary pensions is one, but so too are the rising costs of housing. Aside from eating into a greater share of their present-day income, those struggling to get onto the housing ladder will invariably face higher living costs in retirement too, while also missing out on the potential for property value gains.
Compounding this, the cost of social care continues to increase at a rapid pace, while workers must also contend with stagnant real wages, and sub-inflation savings rates on the money they are able to save. Many may also be unaware that pensioners are still liable to pay income tax in retirement - with Royal London reporting that the average income tax paid by retirees in 2015-16 amounted to a staggering £3,522 each.
So how much should we be saving for retirement?
Another interesting finding from the PLSA was that many people believe the impending auto-enrolment minimum increase to 8 per cent of total income is the recommended target for retirement saving, rather than the minimum. In fact, the PSLA posits that an advisable proportion of income to bundle away into a nest egg should be 12 per cent, with their suggestion being that employers should foot half this amount by law, while Government should contribute 1.2 per cent via tax relief.
The good news is that auto-enrolment has had some positive uptake, with just under 10 million workers signed up to the scheme as at April 2018. According to the Department for Work & Pensions, £4.3bn more was saved towards pensions last year versus 2016 too. Nevertheless, the average amount saved per eligible individual in 2017 of £5,110 is the lowest on record to date, so the warnings about potential shortfalls in retirement are not being sufficiently heeded.
For most people, workplace pensions remain the most effective means of building a viable retirement pot, and in this respect auto-enrolment has hit a sweet spot. If you're enrolled, stay enrolled, and strive to put away more than just the minimum. If you're still unsure how much you should be putting away, you can seek free professional advice from the likes of Pension Wise. They’ll help to ensure that you know what's involved; what goals to set yourself, and precisely how much to squirrel away so that you can build towards the stress-free golden years you deserve.
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