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Retire like your granny? You’ll need to start saving now

Millennials will have to save a lot more than their grandparents to enjoy a similar retirement. We look why and what you can do about it.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Those of us born in the 90s will have to start saving a lot more than our grandparents to enjoy the same level of wealth in retirement, according to new research.

For example, a 23 year old retiring at 68 (their likely state pension age), with an average annual salary of £40,000 over their career, will need £400k more than their grandparents if they want to retire with the recommended two-thirds of their salary.

Why is this?

The reason is simple – we’re living longer and inflation is rising. Being born in the 90s means we can expect to live more than a decade longer than our grannies. A longer life is hardly cause for complaint but it does mean our pension pots are under pressure to last longer.

Plus money in real terms is losing value as we age due to inflation, meaning that money we’re saving now won’t be the same once we retire.

Unfortunately a longer retirement and inflation aren’t the only reasons we’re facing a shortfall.

Generous final salary pensions – commonplace amongst older generations – have been usurped by defined contribution pensions. Few of us born in the 90s will have a defined benefit pension, and the value of our pensions when we retire will largely be based on how much we have saved and the performance of our investments.

There’s also the State Pension. Thinking ahead to my retirement and I’m not sure I’ll be expecting to receive much – if any – income from the government. We’ve already seen drastic changes to pension rules and in the decades ahead it’s easy to imagine cost-cutting governments making big changes to the State Pension – from removing the triple lock, to it potentially not being there at all.

Where do I find the extra money?

Back to the example of the 23 year old retiring at 68, aiming for an income of £26,800 and facing a hefty shortfall. Assuming they start to plug the gap straightaway they’ll need to put away at least £642 per month (before charges) in their pension – assuming a reasonable 5% growth from their investments.

Even after cutting out avocados on toast, £642 is a tough target for most of us.

If you do have some wiggle room in your budget, it could be sensible to pay a bit more into your workplace pension (your employer might match your increase too), or top up your pension pot whenever you have some spare cash.

Remember you’re not tied to your company’s pension. If you have spare cash for your life after work you can open a SIPP (Self-Invested Personal Pension) as well as your company pot. You’ll get the same tax benefits and could also access a wider range of investments. Once your money is in a pension it isn’t usually accessible until age 55 (57 from 2028).

More about SIPP contributions

If putting more away simply isn’t an option right now, look at what you do have – time. More time until retirement means you could take more risk with your investments. The theory is that younger people can afford more risk as they have time to make up the inevitable losses over the decades ahead.

Take a look at the graph below, which shows how different assets have performed over 25 years. Although being invested in the stock market can be volatile, the returns made over the long term have outperformed “safer” assets, such as cash and gilts. Although past performance is not a guide to future returns.

How different assets have performed over the last 25 years - £1,000 invested

Past performance is not a guide to the future. Source: Lipper IM to 12/08/2019

In fact, if you take a riskier investment and see it grow by 8% per year, you’d be looking at a much more achievable £246 per month contribution (before charges). And if you increased your contributions alongside inflation, you’d only need to start with £195 per month, increasing 2% per year until you retire. Of course there are no guarantees, investments will fall as well as rise in value so you could get back less than you put in.

So if you’re comfortable in taking more risk and are investing for the long term, the first step is checking in with your workplace pension. Find out where it is invested and see whether it could be doing better. In most workplace pensions, you don’t have to stay in the default fund and can select more adventurous investments if you decide that’s right for you.

That doesn’t mean putting your whole pension into the latest start-up or new crypto-currency, but instead holding a balanced portfolio, fully diversified with a mix of funds and shares.

More on diversification

And if you’re comfortable making your own investment decisions and have old pensions lurking around, why not think about transferring them to the HL SIPP? You can choose from thousands of investments and check in with your pension wherever and whenever, with our award-winning app.

Plus if you transfer before 3 September, you could be eligible for cashback. If you need longer to consider your options, let us know and we will give you an extra 6 months to decide. Terms apply (see below).

Remember to check for excessive exit fees or if you lose any guarantees or benefits by transferring. Pension transfers are usually done as cash, unless otherwise instructed so you will miss out on any market rises or falls for a period.

More on transferring

This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice.

Terms of the cashback offer – Summer 2019 – SIPP transfers only

  1. You’ll receive a cash amount between £50 and £500, depending on the amount you transfer, when you transfer to us at least £5,000 worth of an existing pension into our HL SIPP from another provider, subject to these terms and conditions. Please be aware the following exclusions apply to this offer: (1) the lodgement of certificated shares will not qualify for the offer; (2) new money cash subscriptions into any HL account will not qualify for the offer; (3) if the HL SIPP is your current workplace pension and you transfer previous pensions provided by your current employer, then the offer isn’t available for these transfers; (4) defined benefit/final salary pension transfers don’t qualify for the offer.
  2. The offer doesn’t apply to investments already held in the HL service, or to switches or transfers between or within existing HL accounts or to income and interest received on any assets held in those accounts.
  3. The offer is funded by Hargreaves Lansdown’s money. Don’t worry, the cash is not coming from your pension or investments. We intend to make the offer available until 3 September 2019. However, we reserve the right to remove or suspend this offer if necessary, including for legal or regulatory reasons or otherwise, by posting a notice on our website. If the offer closes early, all qualifying applications received up until this time will still be accepted.
  4. The offer will only apply to cashback transfer forms coded SCCB1, RTCB1 SCCB2, SCCB3, SCCB4, AWSCB, APSCB, AWST5, APST5, APST5, AWSC3, IT2CB, OTMQA, OTK, OTP, OTD received by us between 7June 2019 and 3 September 2019. The application code should be found in the top right of a form. If transferring a pension for drawdown, you must include a note requesting cashback with your application to qualify. As long as we receive your transfer form within the offer period, even if the transfer itself isn’t completed until after the offer closes, you‘ll still qualify. If you need more time to decide whether you want to transfer to us, please let us know and we’ll extend this deadline for you by up to six months. To request more time simply call our Helpdesk on 0117 980 9926 or email transferoffer@hl.co.uk with your full name and address.
  5. The cashback payment will be paid into your Loyalty Bonus Account after the offer has closed and within 1 month of completing your transfer, which will be determined by us. The Loyalty Bonus Account is separate from the HL ISA, Fund and Share Account, and SIPP. The cash can be kept in the Loyalty Bonus Account for fee collection, withdrawn or moved into whichever HL account you choose. If moved into an ISA or SIPP, it’ll count towards your annual allowance.
  6. The value of your cashback will be based on the total value of transfers you make within the offer period into an HL SIPP, not the value of each transfer. The values will be determined on the day we receive the proceeds for each. It isn’t possible to combine the value of transfers into accounts with different client numbers for the purpose of this offer. The maximum amount of cashback you can receive under this offer is £500.
  7. We ask you keep your HL SIPP for one year. Please feel free to switch between investments and in or out of cash within your account, but if you decide to transfer away or close your account within 12 months of the date your transfer completes, then we reserve the right to reclaim the cashback paid. If cash is to be reclaimed then you’ll be notified and the cash will be taken within 7 days of the account closure or transfer.
  8. We also reserve the right to determine how the cash offer is calculated. Therefore, if you’re unsure how your transfers will be treated under the terms of this offer, please contact us before you return your transfer form. By submitting a qualifying application, you agree to be bound by the terms of this offer. The terms are governed by the laws of England and subject to the exclusive jurisdiction of the English courts.
  9. The offer can’t be used in conjunction with any other transfer offer.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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