Retirement aspirations – Fantasy
or reality?
By Steve LattoWhen the alarm clock rings at 6:30am on a Monday morning many of you may drift into a dream about retiring as your hand hits the snooze button for another 10 minutes rest before contemplating another week at work. You may dream about touring the world or simply spending more quality time with your family in retirement. The reality is that many people’s savings are unlikely to match their retirement aspirations unless they take action.
In recent years the income that individuals can draw from their pensions has been on a downward trend whether this is because of a decline in annuity rates or due to the maximum income levels available via income drawdown falling due to regulatory change and market conditions. The answer most people are looking for is exactly how much income are they likely to need in retirement and perhaps more importantly how do they go about achieving this.
Recently the Pensions Policy Institute (PPI) produced a report titled ‘Retirement income and assets: the implications for retirement income of Government policies to extend working lives’ perhaps not the catchiest title but definitely a thought provoking read. The PPI throughout their report refer to the Minimum Income Standard (MIS) which calculates how much income pensioners require to meet a minimum acceptable standard of living. The figure is just under £11,000 pa for a single pensioner Before Housing Costs (BHC), and around £15,700 pa for a couple. Remember, this is for a minimum income standard – how many of you would want to survive on this? All of a sudden some of those retirement dreams may have become even more distant. A more realistic measure of how much income you may need in order to achieve a similar standard of living to that of your working life is the working life replacement rate, which is generally in the range of 50% to 80% of people’s gross working life income. The PPI research produced a table looking at assumed target replacement rates needed to replicate working life living standards.
Replacement rates are higher for individuals who have had a lower income in working life but in general they will find it easier to meet replacement rate targets as a larger proportion of their retirement income is derived from state pensions. Although, the replacement rate falls as income increases the impact of the state pension in achieving the target replacement rate also declines.
So what can people do if they don’t think their current savings plans will keep them on course for meeting the target replacement rates illustrated above? Firstly consider all the sources of income that you will have in retirement including:
 |
State Pension |
|
Occupational Pensions |
|
Personal Pensions / SIPPs |
|
ISAs |
|
Other investment products |
As far as pensions go you have the option of obviously contributing more to your pension on a monthly basis. However, this may not be feasible for everyone. If you have a number of separate pension pots it may be more cost effective to bring these together. Looking at a pension fund of £100,000 even over a 10 year period your pension could be worth £10,528 more at retirement compared to a provider that retains fund rebates. You should check that you are not losing any valuable benefits on transfer and you may want to take professional financial advice.
Notes: Figures based £100,000 being invested over a term of 20 years with an annual charge of £135+VAT and a fund Annual Management Charge of 1.50% with a rebate of 0.75% applying compared to a product that has no annual charge but retains the rebate. Four deals per annum are accounted for in the Alliance Trust Savings projections in comparison to a competitor model that does not charge for purchases and sells. Deals are assumed to be online and are charged at £12.50 per transaction. An annual growth rate assumption of 7% applies. The actual growth rate over the term will be dependent on investments chosen and performance and may be lower or higher than 7% which will determine the final value of the pension.
Another option may be to use some monies from your ISA or from a less tax efficient investment to top up your pension due to you receiving tax relief at your marginal rate of income tax – this may especially be worth considering if your marginal rate of income tax is likely to fall in retirement.
If you would like to read to the full PPI report please click here.