SO HOW MUCH DO YOU NEED TO SQUIRREL AWAY? WEALTH
Warning: It’s far more than you think. But we’re here to help...
MOVING along the escalator towards retirement can be a financially lonely experience. Nobody speaks to you, offers help or gives you a pat on the back and says your savings plans are on track.
Of course, some are lucky enough to afford a good financial adviser who can be worth their weight and fees in gold – ensuring we stay on course. But such advice is increasingly the exclusive preserve of the wealthy – and difficult to find.
If you were to receive the blizzard of press releases that jam up my work email account every week, there is one overwhelming message you would gather. That we, the great British public, are not saving enough as we tread the escalator. Most of us are sleepwalking into a retirement that will be undermined by financial worries.
The boss of wealth management group Quilter warns of a future where ‘an elderly population with limited financial capability creates a strain on society’.
Meanwhile, insurer Aviva, as part of its ‘retirement reality’ report, says nearly a quarter of employees believe that retirement is going to be nothing but a financial struggle. There is more like this sitting in my inbox but I hope you get the picture.
Even the City’s financial regulators have got in on the act. The Financial Conduct Authority and The Pensions Regulator recently launched a joint initiative on pensions, aimed at identifying the reasons why many people end up in retirement with inadequate income, or less than they expected.
Their worthy objective is to help ‘deliver an environment which contributes to people having higher incomes in their retirement’. I doubt whether they will get there. But eight out of ten for good intentions.
The Pensions and Lifetime Savings Association has also said that both Government and the pensions industry must do more to ensure everyone has an adequate income in retirement. Its idea is the creation of national income ‘targets’ that it says would encourage people to save more.
There are a host of reasons why most of us do not save enough. For example, more pressing financial priorities such as paying the mortgage, the finance on the new car, and the TV package that keeps the children sweet and gives (Dad) access to live Premier League football.
Financial education, or lack of it, is also an issue. Recent surveys indicate that most young adults (85 per cent) wish they had been taught more about money management when they were at school or university. If this had happened, they say, they would now be more financially savvy.
Even when we are nudged into saving, we do not put enough away. Yes, the Government’s drive to get more workers contributing to a pension through ‘auto-enrolment’ has been a success. Some one million people are now saving for retirement for the first time as a result of being automatically enrolled into a works pension.
But the amount most are putting away – no more than five per cent of a slice of their earnings – will not result in financial bliss. Worryingly, more than half of workers believe the minimum auto-enrolment contribution rate of five per cent is the ‘recommended’ amount to save.
No. Experts believe that as a gen- eral rule of thumb, people should be saving a sum equal to at least 13 per cent of their annual income pre-retirement in order to maintain a similar lifestyle once work is no more. Even though some of this sum may be by way of pension contributions paid by an employer, we are talking big numbers.
So how can we ensure our savings are on track and that we are squirrelling enough away? There are pension calculators aplenty online that will give you an idea of the retirement income you are likely to receive based on your current savings and contributions.
This can t hen be compared against the income you should be l ooking t o obtain. The Money Advice Service’s calculator at moneyadviceservice.org.uk is as good as any. All you need are a few key details – date of birth, gender, intended retirement age and the value of your current pension fund plus ongoing contributions.
In five steps, it will tell you whether there is likely to be an income shortfall (bad news) or a surplus (time for popping champagne corks).
Investment house Fidelity has also come up with a useful tool that will probably shock you into action. It has devised a matrix of savings milestones that people should attempt to achieve as they move along the escalator. It has labelled it the ‘ Power of Seven’ savings goals in recognition of the fact that someone who retires at 68 needs to
have saved the equivalent of seven t i mes t heir annual household income in order to maintain their lifestyle into retirement.
In other words, i f household income at retirement is £50,000, they should have a pension pot of at least £ 350,000. To reach this Power of Seven figure, Fidelity says a saver has to squirrel away 13 per cent of their annual income for 43 years.
By the time they hit age 30, they should have built a pension pot worth at least their annual household income. At age 40, the aim is two times annual income, rising to four times at age 50 and six times
by 60. Of course, Fidelity has had to make a series of assumptions in coming up with this simple Power of Seven formula, so it is a little crude (for example, it assumes you will be trying to replace around 35 per cent of your household income when you retire and that a full State pension will also kick in).
But if, at the very least, it provides you with a reminder to up your savings game, it will have proved its worth.
Carolyn Jones, head of pension policy at Fidelity, says the savings matrix is a ‘simple and engaging way for people to hook into pensions’.
An identical tool, she says, has been used by its sister company in the United States for the past four years and it has encouraged many American workers to take more interest in their retirement savings and increase contributions. Her hope is it will have a similar positive impact here.
‘It is all about getting people to think about their long-term savings goals,’ she adds, ‘and gently nudging them into action’. All very worthy – take a look at fidelitypensions. co.uk/retirementguidelines.
Pension experts seem to welcome Fidelity’s new tool. ‘A useful indicator of how much people should be saving for t heir future,’ says Patrick Connolly, chartered financial planner with adviser Chase de Vere.
‘Interesting,’ says Stephen Womack (also a chartered financial planner) of adviser David Williams IFA.
But, as they also say, it is no more than a prompt. Only you – and you alone – can build your own robust retirement fortress. A mission that requires financial discipline.
‘ The more you can discipline yourself to put away today,’ says Womack, ‘the more choices you will have tomorrow. It takes a degree of self-control to commit to saving and not to say yes to every opportunity to spend.’
One tactic he always urges his clients to employ is to respond to a pay increase or job promotion by allocating half of it to spending, the other half to ‘spending for tomorrow’ – in other words, saving or investing it.
It is a ploy Connolly also recommends although he says everyone’s personal circumstances are different. He says: ‘People need to review their retirement planning on a regular basis. While saving 13 per cent of salary a year may be the Holy Grail, it will often not be possible because people are struggling with debt, trying to get on the housing ladder, have just been made redundant, are starting a family or in the middle of a messy divorce.’
Joining t h e wor k s p e n s i o n scheme, using tax-friendly Individual Savings Accounts and making sure you are on course to receive the full State pension are all essentials.
Make it your goal from now on to ensure that when you do get off the escalator, you will have sufficient assets to give you maximum financial security in retirement. Think the Power of Seven.