I attended a conference recently, and one of the key findings really resonated with me. Approximately 65% of women have no idea if they’re financially on track for retirement. As a Wealth Planner, this statistic doesn’t surprise me. I frequently meet plenty of people – men and women – who have no idea how much they will need to live on when they retire. For most people in their thirties and forties, it’s the last thing on their mind. If you’re in this category – please do read on.
How much should you be saving?
According to research by financial services provider One Family, the average person thinks they will need an income of £29,700 a year when they retire. To achieve that, they will need standalone savings of £364,000, plus a full state pension. Some of my clients (male and female) fall well short of that – but women are particularly susceptible to the short-fall.
The reality is that we should all start saving in our twenties, aiming to have at least the equivalent of our annual salary saved for retirement by the time we’re 30.
By 40 we should have saved three times our annual income; by 50, six times; by 60, eight times and by retirement 10 times. If you’re earning £100,000 when you retire, you should hope to have a pension worth £1 million if you want to maintain your standard of living.
Make your pension a priority
The reality is that most twenty-year olds are young, single, and spending their money on their lifestyle. Most thirty-somethings are still enjoying their lifestyle, or are having to prioritise family expenses. And by the time people are in their forties, they might be focusing on paying school and/ or university fees. In other words, pension savings come way down the priority list for many people, regardless of their life stage.
In addition to this, women are more likely to step away from saving for their pension when they have children. Of course, this doesn’t apply to everyone, but I certainly find that many of my female clients either give up work completely, or set up their own business to achieve a more flexible work/ life balance. Either way, the pension contributions stop and are often not restarted.
Five reasons why you should be saving more into your pension:
My advice to anyone, young, old, male or female, is to make your pension savings a priority, before it’s too late. Here are five good reasons why:
1. You are going to need it! The likelihood is you will live well into your eighties. So, unless you want to work until you die, or live in poverty in retirement, then you need to act now.
2. When you contribute to your pension, the Government will return any income tax paid on it. This means a £1 contribution costs a basic-rate taxpayer 80p, a higher-rate taxpayer 60p and an additional-rate taxpayer just 55p.
3. When you are 55, you are free to spend your pension pot as you see fit. You could withdraw all of it and blow it on fast cars and holidays (please don’t!); you could leave it invested and draw an income from it; or you could buy an annuity with it. It’s entirely up to you.
4. You can take 25% of your pension pot tax-free after you are 55 years old, either as one lump-sum or as smaller amounts over many years. After that, any money taken from your pension (either as a lump-sum or as income) will have income tax deducted at your normal rate of tax.
5. If you die before you are age 75, your pension can be passed to your beneficiaries without paying inheritance tax. If you are over 75, then it will be taxed at your beneficiaries’ income tax rate. This is very attractive, and many people are now using other savings and investments to fund their retirement, leaving their pension intact for as long as possible.
By: Lisa Lloyd, Wealth Planner at Sanlam UK