A pension is what every newborn needs
It sounds bonkers, but start saving now for your baby’s retirement and they’ll have a great later life
How much do you really need to live comfortably in retirement? It’s something we tend to spend a lot of time helping people figure out here at Which? – be it through the research we publish in our magazines and on our website; in the campaigning we do on behalf of all consumers; and through our Money Helpline, where we speak to thousands of people about their financial issues every month.
Last year, we tried to pull actual figures together to give consumers a true benchmark to aim for.
We interviewed 1,200 real retirees, asking them to share their actual spending data with us – from food and utilities to travel and health – to build a picture of what is needed to simply get by in retirement, a lifestyle that includes dinners out and a few holidays, or the gold-plated retirement that involves a new car every five years and the bucket-list trips we all dream of.
So how much is enough? We found that, after tax, a couple needs £18,000 a year to cover the essentials.
For a comfortable retirement, it’s an annual income of £26,000. And for the life of luxury? A post-tax annual income of £39,000.
So, that’s what you need. But how much do you need to save up? Well, we did a bit of number-crunching here too.
The vast majority of people are using pension drawdown to generate an income in retirement. So, we added together the state pension a couple would receive (around £16,600 in today’s money) and figured out how much extra they would need in a pension to generate the remaining income needed from a drawdown plan for comfortable and luxurious retirement.
If you were aiming for the comfortable range, you would need a pension pot of £210,000. If you were shooting for the gold-plated retirement, that would require a whopping £550,000.
This is the kind of information we believe can truly help put the financial challenges of retirement into actionable perspective – rooted in real consumer behaviour with targets and milestones for savers to aim for.
And in the past fortnight, these figures have helped me make a big financial decision – not for myself, but my fivemonth-old son.
My wife and I have finally emerged – frazzled, shellshocked but still with a fingertip on sanity – from the surreal first months of parenthood to a point where we actually have some semblance of an evening, with a baby no longer screaming us to attention every few hours. It’s given us the chance to do the kind of life admin that loses all importance when you have the terrifyingly awesome responsibility of looking after another human being.
Thanks to the amazing generosity of uncles and aunts, grandparents and great grandparents–combined with some savings we’d put aside for him while he was being cooked – our little man has started his life with healthy nest-egg totalling a couple of thousand pounds. Very fortunate, I know.
And now I’ve had the chance to think about what we should actually do with it – we’re going to eschew the traditional Junior Isa route, which will see him getting hold of the money at the age of 18, and instead stick it into a pension.
Yes – it’s perfectly possible for my five-month old to start saving for retirement. Children’s pensions operate largely operate in the same way most defined contribution pensions, with a few caveats.
As my son is a non-taxpayer (we haven’t quite put him to work yet), he’s limited to contributing a maximum of £2,880 a year into a pension. With tax relief at 20 per cent added to these contributions, however, the total amount that could be built up for my son is £3,600 a year. Under the current rules, he won’t be able to access the money until he’s 57 (rising from 55 in 2028). What kind of head start will this give him?
Say we could afford to invest the maximum £2,880 a year, which works out to £240 a month (actually £300 a month with tax relief added).
If we invested that for the first 18 years of my son’s life, and it grew by 4 per cent a year after charges, he could end up with around £94,000 in his pension.
If he then commits to saving once he’s in the working world, he’ll have a fighting chance of enjoying the kind of luxurious retirement we’re all dreaming of.
In the course of my research I found a whole host of child pension options.
Many insurance companies offer “stakeholder” pensions which are available for children, which come with a limited choice of investments in which to place your savings but the annual charges are capped at 1.5 per cent for the first ten years and then 1 per cent thereafter.
There’s greater investment choice from a child self-invested personal pension, or Sipp. These are offered by a few fund supermarkets – websites that allow us to trade funds, shares and other types of assets online, and allow us to monitor investments and trade via an app on our phones.
That’s the route we’ve gone down, popping our boy’s small stash into a global equity fund we can monitor and trade with a push and a swipe.
Among the variety of options for saving for children, don’t forget the power of a pension. It’s the kind of investment they’ll be thanking you for long after you’ve gone.