Roz Altmann, the pension minister wants providers to send a wake-up call to pension members 10 years before their anticipated retirement to try and get some better outcomes for the public. (See the Citywire article here.)
To me, this strikes as a waste of paper; the majority of the population is too passive about pensions and assumes, (foolishly), that it will be alright on the night. If you have never had much, are not in debt, have low expectations, have no expensive hobbies, and do not develop chronic illnesses, the State Pension will keep you from starvation, but is officially below the poverty line.
Your private pensions, if you have any, (remembering that workplace pensions were a minority sport until the year before last), will be worth somewhere between 4% and 5% of their fund balance annually, depending on whether you go for an annuity or flexi-drawdown.
Now, you may remember articles in the press a few years ago that complained that long serving teachers with full pension rights could accumulate a pension fund of more than £750,000. Using the 5% figure, that suggests an income in retirement of £37,500, before you allow for indexation, a spouse’s pension, limited National Insurance contributions and tax free cash, all of which will drag the actual income received down. Proper guaranteed income in retirement comes expensive, so either you compromise on the income or the security.
So, assuming you will get full State pension, (and early reports suggest that is less likely than you would expect), you will get about £8,000 per year in today’s money. (The “Triple Lock”* would suggest that this will be robustly index linked, although this is politics, not maths, so anything is possible).
The UK average salary in February 2016 is given by ONS as £25,532, so if we assume half pay in retirement as a good target, a personal pension needs to provide £4,766 per annum to supplement the State Pension. Using the 5% assumption for income, you would need 20 x £4,766 or a pension fund of £95,320 to be comfortable in cash today.
If you need more money in retirement, then simply, you will have to save more!
To give yourself a simplified pension estimate in retirement, fill in the blanks and use your phone or a calculator to do the sums.
Current income =______________
Half Pay =_____________ (Current income/2)
State Pension Estimate =8000
Income Shortfall =_____________ (Half Pay – 8000)
Current Pension funds =______________
Est. Private Pension Income =______________ (Current Pension funds/20)
Est. Income in Retirement =_____________ (8000 + Est.Private Pension Income)
Can you live on it?
Target Additional Income =______________ (Income Shortfall – Est. Private Pension Income)
Extra Pension Fund Required =______________ (Target Additional Income x 20)
How much you would need to pay in each month depends on a number of factors, so I will not try and give you a ready-reckoner for that, but low charges in a pension scheme and a reliable investment plan will make it easier.
For the full picture and to make it easier for yourself, find an independent financial adviser like ourselves and take professional advice.
If you would like to know more about how we can help you plan and realise your financial goals then contact us at email@example.com or call us on 01223 792 196.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.
*Indexed by the highest of CPI, earnings growth or 2.5%. Citation here.