Are you planning on retiring?
Just because saving for retirement is difficult, it doesn’t mean you should give
up; and the current reliefs and allowances on pension contributions should give
cause for optimism.
If you expect to retire on a final-salary pension and with no mortgage, your
perspective on retirement may well be rosy; if you are grappling with debt and
worried about having insufficient pension savings, it may be a different picture.
For some, the question is not how to retire successfully, but how to retire at all,
given that there may be precious little in the way of a state safety net to fall back
Research from the Financial Conduct Authority reveals that around 15 million
individuals are not saving anything towards their retirement and will have to
rely entirely on the State Pension in their later years. 1
Of particular concern is the group of pre-retirees aged 55–64, only half of whom
have given thought to how they will manage in retirement; and only a quarter
know how much they have in their pension pot. 2 These people may only have a
few working years left to build their nest egg.
Why do so many people fail to plan their retirement? This could be partly due
to massively underestimating the amount of money they need to save.
According to BlackRock, those who were asked to calculate how much they
would need for their desired retirement income of £26,000 a year estimated
they would require £233,000 in savings; and yet they would need a pot of
£525,000 for this income, even including the State Pension. 3
People also underestimate longevity and therefore how long retirement could
last. Only 7% of people aged 55–64 today expect to live to 90, but research
indicates that half of them can expect to live that long. 4 The obvious implication
is that many retirement pots will run out too soon.
Many experts are warning that the end of final-salary pension schemes, chronic
underfunding of defined contribution pensions, and increasing life expectancy
are creating a perfect storm that threatens to destabilise the financial wellbeing
of the coming generation of retirees.
The solution is to plan
You have to ask yourself: how much will I need, and how much can I afford to
put away? Then you need to factor in any other sources of retirement income
and you can see the size of the gap you are trying to fill.
Obviously, the younger you are, the longer the investment time horizon and the
most you will have to gain when thinking ahead. However, middle age is a time
when incomes are at or near their peak, so there are significant opportunities to
Subject to limitations, people in the UK can make pension contributions of up
to 100% of their earnings or £40,000, whichever is lower. While paying the
maximum may seem a tall order, remember that the government rewards you
for saving into a pension in the form of tax relief.
Worryingly, according to BlackRock’s research, 50% of people are unaware that
the government boosts pension contributions; the research also showed that
fewer than a third of people are aware of ‘pension freedoms’ changes and how
these impact on their retirement prospects. 6 This is further evidence that lack of
awareness remains one of the key barriers to making adequate retirement
It’s vital savers know and understand all their options for using their
pension; but also that they make the most of the current tax breaks while
1,2,4,5 Financial Conduct Authority, Financial Lives Survey 2017
3, 6 BlackRock, Global Investor Pulse Survey 2017