You’ve started saving into a pension – great! But are you saving enough? One of the most common questions I get is ‘how much should I save for retirement?’. Here are some thoughts from pensions experts.
Q. How much should I save for retirement?
Jamie Jenkins, from Standard Life says: The answer to this does largely depend on when you start saving – the earlier the better, of course – but a pretty good guide is to aim for 10-15% of income, if you can afford it.
Fiona Tait from Royal London says: Don’t just guess. If you don’t want to see a drop in your living standards when you retire it’s important to focus on what you want to get out of your pension rather than what you want to put in. This provides a more realistic view than just saving “what you can”. A financial adviser can help you with this or you could try one of the pension planning tools available on pension provider websites.
Alistair McQueen of Aviva says: I’m afraid the answer is “it depends”, but the fact that you are even asking this question is a great start. As with many things in life, when it comes to savings, the first step is often the hardest. So, step one is simply to start now, at any level. Get used to the habit of saving and you can build from there.
Step two follows, once you’ve got used to the habit of saving. In step two you can consider if you are saving enough for your retirement. “Enough” will be related to your own personal lifestyle and spending habits. “Enough” for a billionaire, for example, will be very different to “enough” for the rest of us! This understandable difference in the definition of “enough” leads to the understandably frustrating conclusion that there is no set savings level that is correct for everyone.
Tom McPhail from Hargreaves Lansdown says: The best answer is to use an online calculator to work out how much you should be saving. It takes five minutes and allows you to personalise your answer to meet your own circumstances. A good rule of thumb is 12% of your income on a monthly basis, including any contributions from your employer.
SAVVY TIP: There are lots of online pension calculators. There’s a retirement planner on Aviva’s website, a pension calculator on Royal London’s website. Hargreaves Lansdown has its own pension calculator and Standard Life has a pension calculator online. There’s also a life expectancy calculator (eek!) on the website of the Pensions Advisory website.
Q. What should you do if you can’t save this much?
Tom McPhail of Hargreaves Lansdown says: Save as much as you can. Bear in mind any contributions from your employer are free money. It’ll come in handy one day.
Jamie Jenkins from Standard Life says: First, think about re-prioritising; perhaps there are things you pay for every month which are simply less important or could at least be reduced. Secondly, make sure you take advantage of help from your employer in the form of any matching pension contributions. Thirdly, remember that even a small amount of regular savings will grow over time and when you come to retirement, having something is always better than having nothing.
Alistair McQueen of Aviva says: Don’t panic! With this understanding you are empowered to consider next steps. So, look at your monthly spending habits. Are there any areas where you could cut back to release extra money for saving? Remember, it is very probable that you will live well into your 80s, so sacrificing some spending today will allow you to enjoy other spending in your many tomorrows.
Save for longer. If you cannot cut back elsewhere, you could save at your current level for longer and retire later, resulting in a bigger pot of savings. But this action should not be seen as a backwards step. Research shows that a longer working life can drive a happier and more rewarding later life. This shouldn’t be undervalued.
Thirdly, reframe you expectations. If you cannot cut back and you cannot or are reluctant to work for longer, then you may be required to accept a lower income in retirement. This conscious decision, however, will allow you to adjust to your new reality.
Fiona Tait from Royal London says: It is important to remember that you are not on your own in this. As well as the tax relief paid into your plan by the government you may well get a contribution from your employer. Employed savers should always check to see if they qualify for matched contributions and if there are top up options available.
The important point is to get into the habit of saving what you can as soon as you can, then you are less likely to miss the money.
Q. How can you increase the amount you save?
Fiona Tait from Royal London says: Ideally you should review your plan each year and recalculate how much you need to save to achieve your target income. If you start saving when you are young you can afford to take more investment risk, which might make up some of the shortfall if they perform well.
If you can’t afford to save as much as you need to when you’re young you can set your pension contributions to automatically increase at each anniversary of the date when you took out the pension.
Tom McPhail of Hargreaves Lansdown says: Some schemes allow you to automatically increase contributions over time. You may be able to give up a portion of future pay rises; if you get any lump sums then think about putting 10% of them aside for your future.
Jamie Jenkins from Standard Life says: One way to increase savings is when you get some form of promotion or pay rise, but another is to consider making changes when you move job or employer. Many young people now will have ten or more jobs in their careers so an increase in saving levels each time someone moved would make a huge difference overall.
Q Do different rules apply to people who are self employed – who may find it harder to save?
Alistair McQueen of Aviva says: The pension principles are the same for the employed and the self-employed – the more you save for your retirement, the more money you will have to spend during your retirement. When you are employed, however, you will enjoy the benefit of your employer doing much of the groundwork for you.
There are many pension products that are available for self-employed people and they carry the same tax benefits as other pensions. They also permit you to start and stop, and increase and decrease your savings as you wish.
Fiona Tait from Royal London says: If you’re self-employed people you’ll get the same tax relief as someone who’s employed, but you won’t get any contributions from your employer. Most modern pensions allow you to very your saving levels so you’re not committed to keep saving the same amount every month.
But you can’t take money out of your pension until you are 55 – which you should bear in mind. The proposed new Lifetime ISA may be attractive if you’re self-employed and under 40, for this reason.
Tom McPhail from Hargreaves Lansdown says: For people who are self-employed, ISAs can be a better answer due because they let you get early access to your money. The new LISA launching next April may be an interesting alternative too.
SAVVY TIP: You can read more about the Lifetime ISA – how will they work and who should have one? in my article.
Jamie Jenkins of Standard Life says: There is a large and growing number of self-employed people in the UK, approaching five million. While the government is considering ways of including them in wider plans to encourage private saving, they can’t be included within automatic enrolment as that relies on having an employer to set up a scheme and pay into it on the employees’ behalf.
However, self-employed people will still benefit from a generous system of government incentives (known as tax relief) for pensions, and modern pension plans tend to be much more flexible – allowing people to stop and start contributions at times of their choosing.
Q. Is there anyone who shouldn’t set aside money for their retirement?
Fiona Tait from Royal London says: If you’re living at benefit subsistence level you are unlikely to be able to build up a pension fund which will take you above this level in retirement. It also makes sense to pay off any outstanding debts before you commit to saving money, although this may be outweighed for some by the need to start building up a fund as soon as possible.
Jamie Jenkins from Standard Life says: It’s difficult to imagine that anyone should avoid saving for retirement. Even if someone sadly passes away before they ever start using their pension, the inheritance rules are now much more generous than before so any dependents, at least, may be more financially secure. There are some people who are lucky enough to have reached the ‘lifetime allowance’ of pension savings of £1 million, where there may be other financial products that become more tax favourable, but the majority of people are unaffected by this.
Alistair McQueen of Aviva says: It is hard to make a case for not saving. For all of us there will come a time when we work no longer and we need some way to keep funding ourselves. If you have access to other money, from elsewhere, then perhaps you are lucky enough not to have to save.
Also, if you are currently on a low income you should remember that you may receive in the region of £8,000 from the state, in the form of your state pension, when you reach your state pension retirement age. If this is enough for you to fund the lifestyle to which you have become accustomed, then it could be argued that you don’t need to save. But for the vast majority, £8,000 would be a foundation income only.
Tom McPhail of Hargreaves Lansdown says: Only if you are either over the ‘lifetime allowance’ limit already, or you have so little disposable income that you genuinely cannot afford to save any spare cash at all. Also make sure you have at least a modest cash reserve available to you in the bank for emergencies.
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