retirement

How Much Should I Save In My Pension?

A report issued in June 2011 by Scottish Widows suggests that

• 49% of the population are not saving enough for their retirement and
• 20% of people are not saving anything at all for retirement

These are worrying figures. None of us wish to retire in poverty but many will do because we do not plan for retirement or we prioritise our mobile telephone or television package over our financial security.

How much to pay and is it worth it?
These are questions we are asked every day and ones that are difficult to give anything other than hard fact, reality check answers. Pensions are expensive and given that people are living an additional 10-15 years in retirement than we were 60 years ago, it is why pensions are in the news so often today.

Tax relief: The government is desperate for us to save in pensions as they cannot afford for us to be a financial burden on society in our retirement years. Therefore, for every £100 you save, the government will add £25 in tax relief making your payment up to £125, making a pension one of the best investment returns you can get today.

But we must save more than just the minimum. To do this, we must understand how much a pension really costs.

The Cost of a Pension

Employers complain that employees do not value their pensions and we tended to agree until recently. Many public sector workers are planning to strike shortly over changes to their pensions. Whilst we have sympathy for both employers and strikers alike, the following may help you understand the costs involved in paying for the equivalent of a local government or a teacher’s pension.

Example: 65 year old Council Worker Earning £30,000 pa with a full pension entitlement of £20,000pa.

• Annuity rate cost for a 65 male, inflation protected, with inflation increases and a 50% spouse pension = 3.48%  (Source FSA Annuity Comparison Tables 22/06/2011).

• Therefore, the cost of an inflation protected annuity on the open market to buy a pension of £20,000 pa, with inflation protection is £574,713.

A £20,000 per year pension costs nearly £600,000!

This is the real cost to the country given that there are over 6 million* public sector workers who mostly have “gold plated” pensions. Add to this another 8 million* people who are economically inactive in the UK, this is a total of 14 million people who are paid for by just over 21 million private sector workers. Most private sector workers do not have “gold plated” pensions nor death in service benefits nor income protection benefits. (*Source Office for National Statistics 15/06/2011)

These high costs are of course the reasons why the government is set on changing public sector pensions to reflect private sector trends and why unions are fighting to protect their members’ rights.

So How Much Should I Save In A Pension?

If you are not lucky enough to work for the State, to save for an equivalent of every £10,000 per year pension you require at age 65, we suggest:

• 20 year olds should save £100 pm and increase payments each year with inflation
• 30 year olds should save £150 pm and increase payments each year with inflation
• 40 year olds should save £200 pm and increase payments each year with inflation
• 50 year olds should save £500 pm and increase payments each year with inflation

So, if you are 30 years old and want a pension of £20,000 pa, you really should be saving £300 per month as a minimum now.

These figures are only for guidance and we hope they help you think about how much to save and when you should start saving.

Tips for Getting a Bigger Pension

1. Talk to us to compare all pension plans.
2. Nil Commission: Pay a fee to arrange your pension and stop high commission charges being deducted over the whole pension term.
3. Only start pension payments at a level you can afford, it is a waste of time if you have to stop payments in a couple of months or years.
4. Set pension payments to slightly increase each year.
5. Set up a yearly review with us (Money MOT) to invest wisely in areas that are up and coming and to lock in the profit that you made in the last year. So many people do nothing and lose the growth they achieved in the previous year by not locking it in each year.