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The retirement reality: it’s time to prioritise your future self

In retirement, many of us dream of travelling the world, or relocating to the seaside, but for the majority this will remain a pipedream. Urgent action is needed to close the increasing retirement expectations versus reality gap.

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. These articles are intended for employers and HR professionals, not for individual investors.

Just 4 in 10 people are on track to achieve a moderate retirement lifestyle as categorised by the Pensions & Lifetime Savings Association (PLSA) retirement income targets.

For a single person, £20,800 is required for a moderate retirement expenditure, increasing to £30,600 for a couple. (Please note the figures increase slightly for those living in London to £24,500 and £36,200 respectively). This budgets £48 a week for food, £730 annually for clothing and footwear, one foreign holiday a year and dining out a few times a month.

Delving deeper, the HL Savings & Resilience Barometer exposed that almost 3 in 10 of the top earners are not on track to achieve this target. It increases to 5 in 10 for the next highest income group revealing both a lack of engagement with pension planning, and a tendency for people to prioritise their immediate wants, at the expense of their future needs.

The nation’s retirement could look basic

Continuing on this path will see the majority of the nation facing a stark reality of a basic retirement. Retirement can seem like a far-off target. But the decline of the defined benefit pension, where employers were largely responsible for ensuring their employees had a guaranteed level of income, means that today we are increasingly responsible for our own financial future.

The State Pension will go part of the way to funding retirement, but at £185.15 a week, it alone will not offer any luxuries. From April 2022 the full State Pension will provide a maximum annual income of £9,630 – and even this is contingent on an individual having 35 years of national insurance contributions. For the majority, £9,630 is unlikely to be sufficient to continue their current standard of living and is less than half of what’s required to meet the PLSA’s £20,800 – their assessment of a moderate lifestyle at retirement.

At present auto-enrolment (AE) minimums require a minimum contribution level of 8% of qualifying earnings, of which your employer must contribute at least 3%. However, in order to achieve the PLSA’s target of £20,800, it is suggested that people contribute 12% of their salary (which is usually higher than qualifying earnings) annually over a 50 year career. Therefore contributing just the AE minimums will result in a shortfall. For those who have the desire to retire early or would like to achieve a more comfortable level of income, the reality is that they will likely need to exceed 12%.

So what can you do?

When it comes to your pension, bigger is generally better.

A larger pot size will give you more choice when it comes to what age you retire and your lifestyle after employment. Being in charge of your future may feel overwhelming, however taking control can also be hugely empowering. Small incremental changes can have a big impact – and remember, it’s never too late to make a meaningful difference.

Pensions offer tax relief on contributions equal to your rate of tax – meaning those 3 in 10 higher earners are missing out on up to 45% tax relief, and an opportunity to reduce their overall tax bill. Paying into your pension won’t cost as much as you think it will, the effective cost to a basic rate tax payer of placing £100 into their pension is only £80. Even better, if your employer offers salary sacrifice with your workplace pension then it’s even more tax efficient because you save both the income tax and national insurance.

Remember money in a pension can’t be accessed until you’re 55, increasing to 57 from 2028. Tax rules can change and benefits depend on your circumstances.

How can I boost my pension pot?

It’s rather obvious, but contributing more will boost your pension, so pay in whatever you can afford. Even the smallest uplift can have a positive effect.

Start by taking advantage of any contributions offered to you by your employer, some companies operate an incentivised structure whereby if you uplift your contribution, so do they. This is additional money that you otherwise would forego.

Use pay rises as an excuse to save

A great discipline to get into is uplifting your pension contribution annually with your pay review, for example if you receive a 3% pay rise, consider placing at least 1% into your pension. This way it’s unlikely to be noticeable – if you’ve never had the money to spend, you won’t miss it. It’s surprising how quickly this will add up with very little impact to your day-to day spending habits.

Knowing exactly how much to save can be tricky, but typically the earlier you begin saving the better – this is because the money has longer to grow. Be realistic about what level of expenditure you may have in retirement, those who are likely to still have a mortgage or will be living in rented accommodation are likely to have higher essential costs and this needs to be considered.

Try our Pensions Calculator to see what you’re on track to receive and work from there. Base it on where you are today and where you want to go.

It’s difficult to think about what life could look like in 10, 20 or even 30 years. But by spending a little bit of time reviewing how your finances look now can hopefully make a significant difference to our future self.

This article isn’t personal advice. If you’re worried about your finances and aren’t sure where to start, you could always speak to a financial adviser. They’re experts at providing you with the knowledge necessary to effectively manage your current finances, and even your long-term goals and plans.

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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. These articles are intended for employers and HR professionals, not for individual investors.

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