Earlier this week Channel 4’s Dispatches program looked into retirement and asked:
“What’s your pension really worth?”
The program featured many of the great and the good from the pensions industry as well as a a brief interview with Steve Webb, the Pensions Minister. It focused on four main areas:
The program focused on four areas:
- How much you need to pay into your pension
- Annuities and the options available at retirement
- The perils of ‘pension liberation’
- Is property a better option than a pension?
But in half an hour (less the ads) what lessons did the programme teach us about pensions? Here’s a few and we’ve added a few of our own.
Lesson #1: Work out how much you need
Very few people can afford to pay enough into a pension; but that doesn’t mean you shouldn’t have a monthly target. So how do you calculate how much you should be paying into a pension?
Step 1: Work out how much income you will need in retirement
Step 2: Factor in inflation
Step 3: Work out how big your pension pot needs to be (rule of thumb: if you want your income to rise in line with inflation when you retire and you plan to stop work around 65, use a figure of 3.5%. That means for every £100,000 you have in your pension you’ll get an income of £3,500 before tax each year. This isn’t exact, but it will do as a rough guide.)
Step 4: Now work out how much you need to pay into a pension to build up a big enough pot
Easy! To be honest it isn’t and the answer you get will only be a rough guide.
Speak to an adviser or use the handy free calculator on our website, you can find it by clicking here: www.investmentsense.co.uk/free-services/calculators
This will give you a far more accurate answer.
Lesson #2: Ignore the noise and carry on regardless
The ‘noise’ surrounding pensions is huge; coverage in the press, much of it negative, articles on the internet, conversations with your work colleagues and of course the ‘mate down the pub.’
You need to concentrate on your goal:
- How much do you need when you retire?
- How are you going to build a big enough pension pot?
- How will you turn that pot into an income when you retire?
Concentrate on these three questions, find sources you trust, listen to them and tune out the rest.
Lesson #3: A helping hand is near; don’t turn down ‘free’ money!
Very few people are paying enough into their pension, but if you are employed help is on the horizon.
If you are employed you will soon be automatically enrolled into a pension; you will have to pay in and so will your employer.
Up until 2016 you will have to pay 1% and so will your employer, this rises to 8% in 2018 of which you will have to pay at least 5%.
Yes, we know you are going to have money deducted from your salary, but your employer will pay in too. That’s ’free’ money, towards your retirement, don’t turn it down. After all, it’s unlikely you are already paying enough towards your retirement.
Lesson #4: Property doesn’t offer an easy answer
The program asked whether property is a better alternative to a pension. Despite interviewing a number of older people who were very positive about property, a calculation showed that over the long term, a pension produces a higher income in retirement.
We’re all for diversification and would argue that for some people property does have a part to play in retirement planning. But for many people it’s impossible to invest in a pension and property.
Investing in property isn’t an easy ride either, the program failed to mention many of the costs and downsides to this method of retirement planning.
Furthermore, with Auto Enrolment now a reality for many, using a pension will now mean your pot receives a boost from your employer.
Lesson #5: When it comes to pensions, ‘liberation’ is not a good thing
In almost every other context ‘liberation’ is a positive word, when it comes to pensions though, nothing could be further from the truth.
‘Pension liberation’ refers to the practice of accessing your pension before the age of 55 and doing so will leave you with a much poorer retirement, high risk investments and in all likelihood a tax bill of 55% of anything you get out.
If you need access to cash quickly, or are otherwise tempted to access your pension before you are 55, take a few minutes to read this blog and then consider other ways of raising cash.
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