Special report: Pensions
The National Employment Savings Trust reckons that an annual income of £15,000 is the absolute minimum required to feel comfortable in retirement in the UK. This seems a very modest annual income to us at the faculty. We would agree more with the research from JP Morgan (2013) showing that individuals need at least 40% of their pre-retirement income to live comfortably.
Taking this as a roughly accurate figure and based on current annuity rates, a pension pot of £1,667 is required for every £100 of income. On this basis, and assuming an annual pre-retirement income of £60,000 would imply a pension pot of at least £500,000 would be needed to live comfortably in retirement.The issue is that to save this kind of money, and assuming a defined benefit pension, you would need to be setting aside quite a large proportion of your pay to achieve this level of pension income. This interplay between addressing your immediate comfort and needs and those of the uncertain future tends to result in the immediate needs taking priority. The lack of investment into retirement is a great concern for government – some 15% of retirees will leave work with no savings this year (Prudential, May 2015).
Government historically has incentivised saving by allowing pension investment to be offset for tax purposes against income and now has brought in a semi-voluntary and very modest national pension scheme through auto enrolment and the UK government’s decision to raise the state pension to a flat £155 a week will go someway to assist the poorest with their retirement.
Many of us will have paid small amounts into a pension when it seemed a long way off to retirement; the closer it becomes the more one wants to invest. The bizarre decisions to curtail tax relief on pension investment to £40,000 a year and tapering away relief for those earning more than £150,000 (from April 2016) do little to assist those used to a more affluent lifestyle who now have less incentive to provide for their retirements.
The system was too generous in the past, of course, with defined benefit schemes and annuities paying for retirements long past their expected termination as the general health of retirees increased their longevity. Cynics amongst us may, of course, understand that as the retirement age creeps up towards 70, we may never actually be allowed to retire at all.
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Comments and suggestions
Robert Russell, Technical Manager, Finance and Management Faculty