If you can see a target, you’ve got a much better chance of hitting it.
As obvious as this advice sounds, it is seldom applied to retirement saving, when hitting your target can be the difference between living out a comfortable old age, or not.
Those saving into a Defined Contribution pension - be it a workplace scheme or private pension, such as a Self-invested Personal Pension - build a pot that they can keep track of, but translating that into a retirement income is not straightforward, so it’s hard to know what will be enough to give them the retirement income they expect.
None of us really know how long we’ll live or what spending demands will be placed upon us during retirement, which could last many decades. Then there’s the unpredictability of financial markets which will also partly determine the income we have to live on in retirement.
With all that uncertainty, a target level of saving that would give you a decent standard of living in retirement would be a great thing to have. It wouldn’t make hitting your target any easier, but it would allow you to know in good time how you’re progressing, and to make changes along the way to improve your chances.
The problem is there’s no definitive answer as to how to draw that target - what counts as decent?
This dilemma was the subject of a lengthy study published this week by the Pensions and Lifetime Savings Association (PLSA). It proposed that interested parties - the pensions industry, charities and government - should pool their thinking so that a widely-recognised methodology can be adopted to build savings targets.
In its report, the PLSA explained that some measures do exist to gauge the adequacy of pension savings. The Joseph Rowntree Foundation’s Minimum Income Standard is a baseline of income it says is needed to keep pensioners out of poverty. According to it, an individual in 2017 would’ve needed a total annual retirement income of £9,998 to meet the standard.
That level of income won’t excite many. The PLSA also highlighted another, higher, target - the Total Replacement Rate that was devised by the Pensions Commission, a body set up to overhaul retirement savings in the early years of this century. Under this target, an individual aims to produce a percentage of their pre-retirement income in retirement. The percentage you need changes as you move up the income scale, but the median earner would need 67% of their pre-retirement income in retirement - in 2017 this worked out as a retirement income of £19,162.
Knowing income targets like this is useful, but individuals are still required to work out for themselves what pension pot is required to deliver it, as well as think about their own circumstances. Will they be mortgage-free by the time they retire? Do they have other sources of income? Could they access the value in a property if they needed to? How, exactly, do you want to spend your retirement years?
These factors mean that everyone ultimately has to build their own retirement target, notwithstanding any helpful guidelines that are built for us. What’s certain is that many will find that, left without further action, their pension savings leaves them on track for disappointment in retirement.
A new Fidelity tool aims to show you the power of increasing your pension saving.
It shows what a difference contributing just an extra 1% of your salary now will make to your retirement fund. After entering your name and age, the tool asks for your current salary and to specify something you enjoy in your free time - something you’d like to be doing if you had more time and money to do it.
Then it works out what those extra contributions could add up to when you eventually come to retire, as well as the cost to you now of making them.
For example, a 30-year-old today earning £30,000 could contribute an extra 1% of their salary and then retire at age 68 with an extra £58,273 in their retirement fund. This example assumes that wages will grow by 3.75% and that the return on invested contributions is 5% after fees.
And the contribution required now for a chance of this reward? Less than £6 a week - although tax relief on pension contributions means that actual cost is even less than that.
The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.pensionwise.gov.uk or over the telephone on 0800 138 3944.
Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Withdrawals from a pension product will not be possible until you reach age 55. Tax treatment depends on individual circumstances and all tax rules may change in the future. You should regularly reassess the suitability of your investments to ensure they continue to meet your attitude to risk and investment goals. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
Combining your pensions into a Self-Invested Personal Pension (SIPP) can make it easier to manage your savings - and it could be cheaper, with lower fees than you’re currently paying.