Aspiring retirees soon-be pensioners should aim to amass a pension pot that ensures they are paid at least £15,000 a year, an industry report has identified.
Once individuals have achieved that level of yearly pension income, they start to feel a lot more at ease and financially secure, the National Employment Savings Trust (Nest) said.
However, achieving a yearly pension pot of over £40,000 will have little impact on overall happiness levels, Nest argued.
The Nest report indicated that contentment and security levels rose substantially for pensioners who earn £15,000 and £2,0000 a year, including their state pension, with a sizeable 43% of the study who earn over £15,000 outlining that they felt financially secure whilst just 24% earning less than £15,000 disclosing that they were happy with their situation.
The Report also revealed that the primary concern of people who earn lower than £15,000 each year from their pension are gas and electricity bills, as well as groceries.
The £15,000 ësecurity and contentmentí threshold includes collective household finances, rather than just a singular pension pot total, meaning that an elderly household could be deemed financially secure providing that they receive over £15,000 from both their pension pots, on the basis of the Nest findings.
The study will assist people in attaining a more accurate idea of the level of finance they will need to gather and save for retirement as an add-on to their state pension.
It has been estimated that the state pension will grant users a credible £7,500 each year when it is officially implemented in April 2016, and the government has made it clear that they aim to educate people about the financial element of retirement before then. It is believed that initiative is being undertaken in order to prepare people to use their pension fund responsibly, now that new regulations have been passed that have given people more flexibility when taking out funds from their pot.
On the basis of the Nest report, a 22 year old who currently has a salary of £20,600 a year would only have to make the lowest possible pension contribution each month in order to get very close to having a £15,000 a year pot by the time of their retirement, with official figures estimating that someone who puts a 4% employee contribution and a 3% employer contribution each month will amass a final pot of £14,260.
However, this figure starts to fall markedly the older someone starts making pension contributions, with someone who is 30 and making equivocal contributions only expected to receive £11,790 in their final pension pot- and this takes the state pension income into account as well.
This trend continues this downward pattern the older someone starts making contributions to their pension pot, so it is advised that if you have a relatively low salary and have begun saving late, that you increase your contributions now so that you are financially prepared for the future.
Nest advice to optimise pension pot size
Nest ñ a zero profit organisation which provides pensions under automatic enrolment- has also outlined a number of advisory measures to help people maximise the amount they save away in their pension.
They argued that if a 30 year old employee stopped getting takeaways and instead made a home-cooked meal at least
one time each week, that they would make a saving of around £12.
And if this was done every week until the retirement age, they could save as much as £50,000 that they could then allocate toward their retirement fund instead.
Moreover, they argued that bringing a pack lunch to work, instead of buying out, could lead to people having an extra £63,000 to use in their retirement fund in the future.
They have also said that changing mobile phone deal to the cheapest one on offer each year could ensure a pensioner has an extra £16,100 in their pot, whilst having just one takeaway coffee and one pack of cigarettes each week could add an extra £11,800 and £31,400 respectively onto a pensionerís final retirement fund.
However, other finance experts have urged people to apply to ìfixed percentageî strategy when it comes to planning their pension, which simply involves people clearly outlining a fixed percentage that they are happy to take from their income, and then taking that amount out each month from their salary, whether it rises or falls.
It has been argued that doing things this way means that those who are typically accustomed earning more, and likely spending more, will then receive more from their pensions, so they do not struggle to make the transition to lower income payments when they do eventually retire.
“The lower someone’s pre-retirement earnings are, the higher proportion of those earnings their pension will need to be in retirement,” said Tom McPhail, pensions expert with Hargreaves Lansdown.
“If someone is on a salary of £15,000, they will want a replacement rate of at least 80%,” he said.
“Someone on a salary of £30,000 might want a two-thirds replacement rateî.
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