Should you bother saving for a pension at all? For many people it can seem a daunting and futile task.
For starters there is the sheer amount of money you need to save. Many of the articles you read on this subject leave the distinct impression that if you haven’t started a pension plan on leaving school, and are putting away a third of your salary each month, then you are destined to a life of shelf-stacking in B&Q in your 80s while living off cat-food sandwiches.
Frankly it is all rather depressing. It is all very well telling people they should have started a pension yesterday, but most of us have more pressing money worries in our 20s and 30s. For example: how do I get a decent-paying job, how can I afford to get on the housing ladder and then how can we afford to bring up the kids with only one and a half salaries coming in?
I have every sympathy with those that have left it too late and then simply panic when they see what a mountain there is to climb. If you fit into this category you may want to briefly look away now – some scary figures are coming up. (But don’t worry, it’s only for a couple of paragraphs).
At the age of 23, as a fresh-faced female graduate, you need to save about £350 a month, before tax relief is added, to retire on £20,000 a year. By 30 – if you have not made any pension provision to date – this rises to about £590. But by 40 a woman starting a pension has to put almost £900 a month into a pension to secure the same retirement income. At 50, financial advisers could be forgiven for suggesting you buy lottery tickets instead.
The good news for men is that they need to save ever so slightly less, because they don’t need to accumulate quite such a big fund to produce an income of £20,000 a year. The bad news is that this is because statistically they are likely to shuffle off this mortal coil far sooner in retirement.
Those of a nervous disposition can rejoin us here. Because if you can’t afford to salt away £900 a month, or ever half this amount – and let’s face it that’s most of us – then here are some more practical solutions you may want to consider.
Forget about that £20,000 goal. Simply put aside what you can to kick-start the savings habit. You don’t have to concentrate solely on pension plans either. These do attract generous tax relief but the downside is that your hard-earned cash is locked away until 60 or 65.
Look at other savings vehicles, in particular ISAs. These are tax-free savings plans, that allow investors to keep their money in cash or in stocks and shares, and allow you to cash them in as and when they need the funds.
And just because you opt to save in an Isa doesn’t mean you have to give up the tax relief on pensions altogether. It is possible to invest your Isa into a pension at a later stage, perhaps as you near retirement and get tax relief on these contributions then.
Don’t forget property either. Thanks to falling house prices, many people will be feeling a little less confident that their over-priced two-bed south London flat will enable them to live like kings in their old age. But the long-term outlook for property remains positive, even if values fall over the next few years. And as you near retirement it may be possible to release some of the equity in your home to help boost your retirement income.
In a similar vein don’t overlook company pension schemes. Even if you can only contribute a minimum sum, it is worth doing so, particularly if your company is matching these contributions. This is money for nothing – don’t turn your nose up at it.
It is also worth pointing out that many people think they can’t afford to save but once the money is deduced automatically from their salary, they still find there is enough – just about – to see them through the month. We tend to make do on what we have, and fritter away any extras, so make sure money is going into pension or savings plans at the start of the month.
The final point you may want to consider is to re-adjust your expectations. Many of the figures – like the ones I quoted above – assume that we are all aiming to retire on a retirement income of two-thirds of our salary. This was the norm when most people had gold-plated final salary schemes. We may have to accept that this is simply not possible by savings from your disposable income, and we may have to settle for smaller pensions as a result.
But don’t let this stop you savings altogether. Giving up completely and relying on the state to bail you out is the surest way of condemning yourself to an impoverished old age.
By Emma Simon