The new state pension is roughly £8,000 per annum. So if your pre-retirement salary was £24,000, then half is £12,000 of which you are already going to get £8,000 from the state. You need to save enough to provide an income of the other £4,000 for the expected 20-year lifespan. That means you need a fund of £80,000 at state pension age to pay yourself for that period. If your salary is higher, then the amount you have to save is greater, because the state pension is flat, apart from annual inflationary increases.
There is no point saying to an employee that they need to save 5 per cent of their salary if they are not sure what this means in practice, and then find that they cannot save the money anyway. A barrage of recent reports demonstrating how meagre the nation’s savings are proves just how difficult it is to provide for today while planning for tomorrow.
So how do you make provision for your later life? Start with what is affordable. The government selected 1 per cent as the auto-enrolment minimum because it has little impact on take-home pay. This rises in April 2018 to 3 per cent and it will be interesting to see if this is paid without concern.
It then rises again 12 months later to 5 per cent from the individual, at which point the employer will be adding 3 per cent, giving a total of 8 per cent. But is that enough? It is still short of the 12 per cent figure that has been discussed in the past and less than the comparable figure in Australia of 9.5 per cent, paid solely by the employer.
We all need to live for today and plan for tomorrow. When we are young, a social life, holidays, a smartphone and saving for a house, are more important than saving for an event that might happen in 40 years’ time.
Our priorities change as we find a partner and have children, which in turn increases our costs at a time when one partner’s income reduces. At this point, the emphasis should be on the present, with retirement still 30 years away. We really begin to think about pensions in our 40s.
So, after three years, is auto-enrolment the right answer? I certainly feel compulsion is essential, which is now helped by the pension freedoms introduced in April 2015. The Association of British Insurers (ABI) has reported that there have been 300,000 lump sum payments under pension freedoms, the average figure being £14,500. Sadly it is clear that some have taken cash from a tax-free environment and moved it into a taxed environment, which re-emphasises the need for education.
