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 on.
Research from the Financial Conduct Authority in 2017 revealed that around 15 million individuals were not saving anything towards their retirement and would have to rely entirely on the State Pension in their later years.1 The introduction of pension freedoms has helped somewhat: figures for 2018 show that nearly 80% of working-age employees were contributing to a pension.2
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.3 These people may only have a few working years left to build their nest egg.
In the UK, 31% of adults have no private pension provision; and the State Pension is the main source of income in retirement for 44% of retirees.4
Why do so many people fail to plan their retirement? According to BlackRock’s latest survey results, 57% of people aren’t currently investing. In the UK, 58% of non-investors say they don’t have enough money to start investing; and 42% are too worried about their financial situation today to think about the future.5
Those able to put some aside really should: people massively underestimate 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.6
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.7 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 catch up.
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.8 This is further evidence that lack of awareness remains one of the key barriers to making adequate retirement provision.
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 building one.
Finally, 61% of non-investors recognise that their outlook would be better if they started investing now; and 76% of investors who use a financial adviser report having a sense of wellbeing.9
1,3, 7 Financial Conduct Authority, Financial Lives Survey 2017
2 Institute for Fiscal Studies, October 2020
4 Financial Conduct Authority, ‘The financial lives of consumers across the UK’, report 20 June 2018, updated January 2020
5, 9 BlackRock, 6th Annual Global Investor Pulse Survey, February 2019
6, 8 BlackRock, Global Investor Pulse Survey 2017
For more information or to assess your retirement and pension plans, contact Roz Barnes of Roz Barnes Financial Planning Ltd. on 07595 165520 or email firstname.lastname@example.org.