Opinion: we need to stop scaring people into inaction over pensions


Updated on 11 September 2019 | 1 Comment

Rather than shout about the massive sums we'll all need for retirement, we should focus on the brilliant incentives that make achieving that goal easier than most think.

As someone who’s only been saving into a pension for a few years, I understand the fear of not being able to save enough.

There are countless studies released each month warning that we need to amass hundreds of thousands of pounds for our retirement, while we're constantly reminded that even the tough new auto-enrolment contribution levels will likely leave us short of cash in retirement.

So it’s hardly surprising that so many people feel like saving for retirement is an impossible dream. Given their current income, there's no way they could set aside such a massive sum of money, so why bother?

I think we in the media could do a much better job of highlighting how achieving that goal is far easier than most people realise.

Not because they don't need hundreds of thousands of pounds – they do – but because of the various factors that will help supercharge their savings over the years.

Everything you need to know about pensions

Don't worry if you aren't on track – yet

A general rule of thumb is that you should be saving half your age as a percentage into your pension, which unattainable for a lot of workers – and particularly for young people.

If you’re in their 20s and 30s, you are likely to have more pressing goals such as saving for a house deposit, getting hitched or starting a family.  

Of course, preparing for later life is important but you need to take care of other needs too.

In some cases, achieving big life goals earlier can help you plan a comfy retirement.

For example, buying a house at an earlier age will help you in later life as you will hopefully be finished with pesky mortgage payments before you retire.  

It’s important to note the amount you need to save for retirement varies, depending on your needs and desires.

Pension freedoms: all you need to know

Pot of money next to a small clock. (Image: Shutterstock)

Here's what a comfortable retirement looks like

According to Standard Life, basic living costs in retirement are on average £10,200 a year, while a two-week holiday every year and weekly dinner or drinks out will bump this to £14,750 before tax.

The investment company calculates a two-week holiday will cost £2,300 and budgets around £43 a week for dinner or drinks.

If you wanted to have enough money for 30 years based on these conditions, you would need £442,500.

So, how long would it take you to get there?

According to Nutmeg, if you are 21 when you start contributing to a pension, you need to tuck away £280 a month to get an annual pension worth £14,750 if you retire at 70.

Achieving that might seem like a huge challenge, especially given the pressure on most workers' salaries these days.

Compare investment options at loveMONEY (capital at risk)

Why it's not that hard to achieve

It can be easy to overlook many vital yet positive contributors to building a nest egg for retirement.

Sure, there' the money you're setting aside from your salary, but that's really just the start.

You can get tax relief either by your employer taking workplace pension contributions out of your pay before deducting tax, or your pension provider claiming tax relief and adding it to your pot.

There are also Government incentives like the Lifetime ISA, which promises to top up any of your additional savings with a 25% bonus provided you put it towards your retirement.

Finally, there's compounding, essentially interest you earn on the interest that’s built up, which will provide an incredible boost to your pension pot over the years.

So, even though a worker's monthly contributions might be small, they're probably doing a lot better than they realise.  

And this is the message we should really be pushing when it comes to pensions. Let's focus on the help available rather than scaring people with the huge sum needed decades from now.

Happy retired couple. (Image: Shutterstock)

A practical example

For example, if you contribute 5% of a £30,000 paycheck under the new workplace pension rules, this would amount to £1,500 annually.

This is then be topped up by your employer to the tune of £900. This already puts us within £80 of the £280 monthly target suggested earlier in the article.

And this is before we include the impact of compounding or investment returns.

What's more, we may be eligible for the State Pension (currently £168.60 a week) if we've have made enough qualifying years of National insurance contributions.

Also, we could try and boost your pension by increasing your contributions whenever we get a promotion or when have more income – perhaps when we've finished saving for a house deposit.

Default pension funds: make sure you aren't left massively out of pocket

What’s the best approach?

With retirement saving, it’s best to start as early as possible and try and boost your contributions whenever you can.

Of course, the value of your investment could go up or down, so there’s no guarantee of what you’ll get but starting earlier could help smooth out returns.

We’ve listed top tips to get the most out of your pension courtesy of The Pensions Advisory Service:  

  • Calculate how much you may need;
  • Check your National Insurance contributions
  • Don’t opt out of workplace schemes if you can avoid it;
  • Save more if you can;
  • Track how your pension is performing and reviewing your pension options if need be

Saving for a pension can be scary but you can do it if you plan ahead, keep track of how your pension is doing and by topping it up whenever you can.

Pension advice: when you need it, where to get it and how much it will cost

 

Why not read these next?

17 steps to make your early retirement dream a reality in 2019

Why the cost of topping up your NI contributions is about to rise

How to top up your State Pension

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