A headline grabbing press release yesterday, which caused huge debate on Twitter, could leave many people unnecessarily worried about their retirement planning.
The release from the deVere group said: “the average 30 year old British worker should be putting aside £824 a month, if he or she wants to retire at 65 with the recommended level of pension income.”
This eye-watering monthly contribution is based on:
- The UK’s average salary of £26,500 per year
- The assumption of retiring at the default retirement age, with a pension income of 75% of pre-retirement earnings
- No current savings
- Annual inflation of 3%
- Pre-retirement investment returns of 5%, and post-retirement investment returns of 3%
For most people, saving the best part of £10,000 each year into a pension is a hugely scary thought and rightly so. The UK’s average wage of £26,500 equates to a net take-home pay of £1,736 per month. This means, according to deVere’s figures, the average 30 year old needs to put around half of their take-home pay into a pension.
For almost every 30 year old, who will typically be struggling with student debt, building a career and getting onto the housing ladder, the thought of having to pay such a huge amount into their pension is a hair raising prospect.
We think your average 30 year old could be extremely worried by this research and potentially put off planning for their retirement, in the mistaken belief they will never reach the £824 per month contribution level. So we’ve pulled together six reasons why a 30 year old doesn’t need to put £824 per month into their pension:
#1: You don’t need to do it all yourself: Part 1 – Tax-relief
Pension contributions qualify for tax-relief, simply put. this means for every £80 you contribute, a further £20 is added.
Even better, 40% taxpayers can claim back an extra £20, reducing the net cost of each contribution to just £60.
There is a limit to the amount of pension contribution which qualifies for tax-relief, but at £50,000 in the current tax-year and £40,000 next, the cap shouldn’t trouble most people!
#2: You don’t need to do it all yourself: Part 2 – Employer contributions
Many employers now offer work-place pensions, to which they will contribute if an employee signs up to pay in themselves.
Those employers which don’t currently offer a pension will have to do so over the next few years, as Auto Enrolment is extended to all companies.
Not joining a work-place pension and taking advantage of the extra contributions from your employer, is effectively giving away free money. Saving for retirement is hard enough, all employees should therefore take advantage of any contributions available from their employer.
#3: Remember the State Pension
Successive governments have tinkered with the State Pension, but it is still a hugely valuable source of income for most people in retirement.
Not only is the income from the State Pension guaranteed, it is also, currently at least, index-linked, helping to maintain the buying power throughout retirement.
A 30-year olds state retirement age is currently 68, this is likely to increase over the next three decades, but even if it does, don’t underestimate the State Pension; it’s worth its weight in gold. In fact to replace it would cost well in excess of £200,000.
#4: It isn’t all about pensions
There are many other ways of building a financial secure retirement.
Sure, pensions have a couple of very attractive features in tax-relief and employer contributions. But there are many other options, ISAs (Individual Savings Accounts), buy to let property, plus additional savings and investments to name a few.
Effective retirement planning is about using a variety of vehicles and taking advantage of all tax-efficient options; pensions are not the only game in town.
It’s a sad fact that with retirement coming later in life for many of us, any inheritances you are due to receive may be available before you retire.
No one likes to think of their parents or loved ones dying, however the reality is that for many people any lump sum inheritances they receive, may well provide a significant part of their retirement income.
#6: Beware the cliff edge
The days of men reaching 65 and women 60, stopping work completely and drawing their various pensions are frankly over for most people.
More and more people are continuing to work part-time in retirement. Perhaps because they enjoy either work, need the income to make ends meet, or are self-employed and just want to ‘keep their hand in’.
Whatever the reason, continuing to work, albeit on a part-time basis, can often be part of the retirement solution, especially with the State Pension age being pushed further and further back.
So, should you be paying £824 per month into a pension?
That’s too complex a question to answer here without knowing more about your personal circumstances. Much depends, on when you want to retire, how much disposable income you have, your attitude to risk, work-place options, the level of income you want in retirement plus many other factors too numerous to list here.
What we do know though, is that headlines saying you should pay half of your net pay into a pension should not scare you off planning for retirement. The natural reaction when you can’t get close to such a figure, is to think why bother doing anything at all.
This reaction should be avoided at all costs.
You don’t need to do it all yourself, there is plenty of help along the way, but you do need to take the initiative and start planning for your retirement, or indeed review existing plans to make sure you are on track for a financially secure retirement.