Glass half full?
Just because saving for retirement is difficult, it doesn’t mean you should give up; and the current reliefs and allowances on pension contributions should give cause for optimism.
Your perspective on retirement is probably like Schopenhauer’s glass. You see it as half full if you expect to retire on a final-salary pension and with no mortgage; or as half empty if you are grappling with debt and worried about having insufficient pension savings.
For those who see their glass as half empty, the question is not how to retire successfully, but how to retire at all, given that there may be precious little in the way of a state safety net to fall back on.
The latest research from the Financial Conduct Authority reveals the number of people who are more likely to feel pessimistic about their retirement prospects. It has found that around 15 million individuals are not saving anything towards their retirement and will have to rely entirely on the State Pension in their later years.1
Of particular concern is the group of pre-retirees aged 55-64, only half of whom have given thought to how they will manage in retirement and may only have a few working years left to build a sufficient savings pot.
Why do so many people fail to plan their retirement? This could be partly due to them massively underestimating the amount of money they need to save. According to BlackRock, those who were asked to calculate how much they would need for their desired retirement income of £26,000 a year, estimated they would require £233,000 in savings. Yet they would need a pot of £525,000 for this income, even including the State Pension.2
People also underestimate longevity and therefore how long retirement could last. Only 7% of people aged 55 to 64 today expect to live to 90, but research indicates that half of them can expect to live that long.3 The obvious implication is that many retirement pots will run out too soon.
Despite nearing retirement around a quarter of those aged 55-64 do not know how much they have in their pension pot.4
Many experts are warning that the end of final-salary pension schemes, chronic under-funding of defined contribution pensions, and increasing life expectancy are creating a perfect storm that threatens to destabilise the financial wellbeing of the coming generation of retirees.
Ian Price, divisional director at St. James’s Place, is a little more optimistic. He believes that to start seeing retirement as a ‘glass half full’ you need to have a plan.
“You have to ask yourself: how much will I need, and how much can I afford to put away? Then you need to factor in any other sources of retirement income and you can see the size of the gap you are trying to fill.”
“Obviously, the younger you are, the longer the investment time horizon and the most you will have to gain when thinking ahead. However, middle age is a time when incomes are at or near their peak, so there are significant opportunities to catch up, and the end of the tax year presents an ideal opportunity to do so,” says Price.
People in the UK can make tax-free pension contributions of up to 100% of their earnings or £40,000, whichever is lower. While paying the maximum may seem a tall order, remember that the government rewards you for saving into a pension by giving you extra money in the form of tax relief.
“Clearly this top-up to pension contributions can make a big difference to your savings, and yet many people are unaware of it,” says Price.
This assertion is backed up by BlackRock’s research, which revealed that 50% of people were unaware that the government boosts pension contributions. The research also showed that less than a third of people didn’t understand or know about the impact of the 2015 pension freedoms changes on their retirement; further evidence that lack of awareness remains one of the key barriers to making adequate retirement provision.
18% of people who have accessed a defined contribution pension in the last two years do not know what they have done (e.g. taken annuity, income drawdown).5
Price believes that it’s vital savers know and understand all their options for using their pension, but that they also make the most of the current tax breaks while building one.
“The end of the tax year is often seen as a crucial time, as it provides the final opportunity for individuals and couples to take advantage of reliefs and allowances that would otherwise be lost,” he says.
"Now is a good time to take advice. You may find that you are missing out – and if you are not, at least you will have the reassurance of knowing that you are not."
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
1,3,4,5 Financial Lives Survey 2017, Financial Conduct Authority
2 Global Investor Pulse Survey 2017, BlackRock