How much do you need for a comfortable retirement? It’s the thing that every saver wants to know, but one that’s almost impossible to answer. When you start contributing to a pension (hopefully) in your 20s, how on earth are you going to know what your life, health, family and the future will be in four to five decades’ time?
I’m not the only one thinking about this. This week, the Pensions and Lifetime Savings Association (PLSA), the trade body that represents pension schemes, revealed that more than three-quarters of people have no idea how much is enough for retirement, and more than 13 million people will not hit the amount needed to generate a decent income once they stop work.
Which? has carried out plenty of research into this. Earlier this year, we surveyed thousands of retirees to find out how much they needed to at least cover the essentials and what more they had to find to have the kind of lifestyle they wanted in retirement.
Retired couples told us that £18,000 a year was enough to cover the household essentials – food, utilities, transport and other costs.
Throw in short-haul holidays and some leisure activities and that jumps to £26,000. If you want exotic holidays and new cars, you’ll need to generate an annual income of almost £40,000 to do so.
The equivalent pension pot for a comfortable income, we found, was £210,000; for a luxurious one, it was £550,000.
But if you’re going to hit these kinds of targets what do you need to do? The longer you leave it to save, the more challenging it is. To get to £210,000 in today’s money, someone aged 20 would need to be saving £131 each month. If you only start saving aged 30, that jumps to £198.
Leave it to age 40, and you need to save £338.
And to live the high life in retirement? If you’re 20, you’ll need to tuck away £342 a month. Start at age 30 and that ratchets up to £518 a month. If you don’t start saving for retirement until you’re 40, we found that you’d need to be shovelling almost £900 a month into your pension to hit this target.
The majority of Britain’s pension savers are a long way off from this becoming a reality.
Auto-enrolment, the law that requires employers to automatically put their staff into a pension scheme, has been a resounding success so far, with more than eight million people saving into a pension for the first time since it was introduced in 2012. It hit another milestone last week, with small employers, even those with just one employee, now compelled to offer a pension to staff.
By 2020, the government expects 11 million people will be eligible for auto-enrolment and £17 billion to have been saved into pensions since the law was introduced. Auto-enrolment has, thus far, been an excellent example of well-thought-out and executed government policy that will deliver real benefit to society and the economy.
But contribution rates are, at the moment, too low. Employers and staff have to pay a minimum of 2 per cent of qualifying earnings into a pension currently, made up of just 0.8 per cent from the employee, 1 per cent from the employer and the remaining 0.2 per cent coming via tax relief from the government. Next year, that increases to 5 per cent; in 2019, it goes up to 8 per cent.
It’s unknown what impact this will have on the success of auto-enrolment, and whether employees will baulk and opt out if they see as much as 5 per cent of their salary disappearing into a pension.
But the PLSA argues that the progression of contribution increases is still inadequate to help people get the kind of income they need or desire in retirement. It says that ‘there is a strong case for increasing minimum automatic enrolment contributions to around 12 per cent of salary’.
It says a median earner, taking home around £27,000, could expect to get an annual income of £15,000 in retirement if contribution rates were set at this level – certainly enough to cover the essentials.
The PLSA wants to introduce income targets for pension savers, letting people know what a good pension pot looks like, which can act as an incentive for people to contribute more, or plan how their other assets, such as their property, can be used to help them achieve their targets. It’s a system that’s already used in Australia with great success, giving individuals and couples tangible targets around which to plan their retirement savings.
I buy into this. If you can find an effective way to articulate how a few extra pounds missing from your pay packet today will benefit you in retirement – and what the consequences will be for you if you don’t act – you’ll make the process of pension saving all that more palatable. Maybe that answer to the £550,000 pension question is right around the corner.
Gareth Shaw is head of Which? Money Online