Warn­ing: It’s far more than you think. But we’re here to help...

The Mail on Sunday - - News - Jeff Pre­stridge

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 mon­eyad­vice­ser­ 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.­tire­ment­guide­lines.

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.

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