Don't listen to pension scare stories
An article this week claimed you need a pension pot of £725,000, but you may only need to save half of that amount
There was an interesting story in The Times on Saturday, entitled "Why you need a pension pot of £725,000". I read it with mild panic knowing that nothing short of a miracle would leave me with pension savings worth almost three-quarters of a million pounds.
I quickly realised I didn't need to panic as I certainly don't need a pension pot that large.
The article comes to its £725,000 figure on the basis that "Brewin Dolphin says that today’s 18- to 44-year-olds want to enjoy an income in retirement of £30,000".
The problem is those 18 to 44-year-olds haven’t given a thought through response to a question about the income they want in retirement. Most of them will have simply said how much they earn now, or maybe a little bit more.
In reality, most of us should need a smaller income in retirement. Hopefully, you will have paid off your mortgage so that huge drain on your finances is gone. You also won’t be paying for all the costs associated with a job: commuting, suits, coffees, lunches out and so on. Your tax bill will probably fall too and you won’t be making sizeable pension contributions anymore.
As a result the income you need in retirement should be substantially lower than your working income.
"Once you retire your day to day costs will likely change," says Jonathan Watts-Lay, director of Wealth at Work in Moneywise. "You will often be paying significantly less income tax, have no National Insurance or pension contributions to make, and often mortgages and loans are paid off."
Once you’ve worked out all the outgoings you won’t need to pay anymore, many people find they need as little as half their working income to fund their retirement lifestyle.
However, even if you work out you only need half the income in retirement you thought you did, you still need to have a pension pot in place that can provide that income - and there is undoubtedly a pensions savings gap in this country.
The research by Brewin Dolphin revealed that one in four people are saving nothing for retirement, while another 18 per cent are saving less than five per cent of their net income.
“UK households on average save 6p out of every £1, compared with 15p in 1992,” says Mark Atherton in The Times.
But, rather than trying to terrify us into a pension saving frenzy the industry needs to start putting out educational information on how to realistically plan for retirement, rather than unobtainable savings targets.
In order to save a £725,000 pension pot you would “need to save £437 a month from age 18 or £793 a month from 30, assuming a return of four per cent net of charges," says Liz Alley, director of financial planning at Brewin Dolphin.
There are very few people who can afford to do that. But, to save up a pension pot worth £362,500, enough for an annual retirement income of £15,000 once you include the state pension, you would need to save a far more realistic £220 a month from 18 or £400 from the age of 30.
So, before you start panicking about how you can’t afford to build up a £725,000 pension pot, take the time to figure out how much money you might actually need in retirement. You may well be pleasantly surprised - but may also find you can't afford to be complacent.