How is your pension provision? Unless you are Sir Fred Goodwin, who recently resigned as chief of the Royal Bank of Scotland with an annual pension of £703,000, your current personal pension provision may be in need of some attention.
The basic State Pension, which was sufficient to sustain several post-war generations, was linked to earnings until the late 1970s, when government linked it to retail prices instead. As a result, it has lost much of its value, and many today are shocked by how little the basic State Pension will contribute to their retirement planning.
The full basic State Pension is currently £95.25 per week, or £4,953 per year (that is the full pension; depending on your National Insurance contributions, you could get a lot less).
With Pension Credit, which is the state means-tested top-up for those who have no other savings, this can rise to £130 per week for a single person, or £198.45 for a couple. If you have savings, you may not get this supplement, leaving many feeling they are being penalised for having saved.
The key to sustainable, sensible pensions saving is to calculate the income you would like to achieve in retirement, then work backwards and estimate how much you need to be saving now, in order to achieve that.
In this, sitting down with a financial adviser and factoring inflation into the equation is crucial. In 1978, for example, average earnings were £4,200, and a loaf of bread cost 21p. With a loaf of bread now costing over £1.00, This may show how much your buying power may fall, from today until the day you retire.
Also, increased longevity means that pensions have to sustain us for longer. Currently, pension scheme actuaries assume a lifespan of 87 years for a man, and 89 years for a woman. This means that our pension pot must now fund a retirement of over 20 years.
How much should we be saving, in order to achieve a decent level of comfort in our retirement?
As a rule of thumb, the experts recommend that if you take your age, then half it, you have the percentage of your income you should be saving into your pension. In other words, a woman of 40 should be saving 20% of earnings, a man of 30 should be saving 15%, and so on.
However, with research from the Halifax and others now telling us that over half of UK workers have no pensions provision at all, and with the number of over-75s in the UK set to increase by 55% in the next 20 years – the potential for a demographic time bomb is clear.
In the UK we are less focused on retirement planning than say the United States or Australia. Why do you think this is?