Are you saving enough for your retirement? Can we even expect to retire in the future?
Today’s millennials are expected to work longer live longer and have less to fund it. Who will pay?
Iona was on a panel of three on today’s The Death of Retirement series on BBC Radio 4’s Moneybox, alongside Steve Webb director of policy at Royal London and former pensions minister and Chris Currie director of the Pensions Policy Institute.
The first caller Ben, 18, runs his own marketing business with 36 staff across the UK. Wanted to know why he should start now with a pension.
Chris said compound interest on early contributions means you earn more and more each year as interest builds up. If you started saving at 25 you would need £150 a month for the same £100,000 fund that would need £200 a month at 35 and £300 at 45.
But when young people hear they need to save hundreds of thousands for retirement, is it really helpful to have a target?
Iona said sometimes too high a target can be demoralising. According to the International Longevity Centre, young people would have to save 18pc to 20pc of salary to enjoy a decent quality of life in retirement. That sounded daunting, but the sooner you start the more you get into the habit, and at work contributions come out of pre-tax salary and you are not noticing it so much.
Steve Webb said the Lifetime Isa could work as an addition to a workplace pension, but the dangers are that the money is tied up and you would be penalised to access it. If you are employed you would be giving up employer’s contribution into a pension.
Emily called to say she wasn’t saving because she can’t afford it, she has “a mortgage, lots of bills and a child”. As a local govt employee when her salary goes up it is outweighed by the rising cost of living, and she has no job security having been made redundant 3 times in 10 years.
Chris said the LG pension scheme was one of the best, her contribution would attract tax relief and it would be doubled by her employer.
But emails from Derek and Clare said high rents and other demands meant pensions could not be a priority.
Iona said young people are stuck between a rock and a hard place when it comes to retirement. Working longer will suit people who do not have physically taxing jobs, but others who want some ease when they are older are inevitably going to have to save more in the here and now and therefore think harder about what they spend their money on.
How much should people in 30s and 40s save? Chris said you can save more and retire earlier, save less and retire later, or a combination. Start at 20 and you need 10% contribution at 30 you need 15% and so on.
Iona said education is a huge part of this – there is not enough education in schools or workplaces on the basics of savings let alone retirement. Many in their 20s are not at first base in terms of paying off expensive debt, rainy day funds and so on. The danger is that auto-enrolment will lull people into a false sense of security….the fact is you are going to need to supplement what you are paying into your workplace pension with other savings.
Caller Melissa said she has been saving for three years to help pay for university costs, and in order to save at all at 20 you have to miss out on a lot of fun things. She sees pensions as a bit unreliable..
Chris said going out and sorting your own pension is not an easy thing to do. You need to be sure you are saving for the long-term, and there is investment risk. We don’t know what will happen, to the markets, economy, interest rates, or to us, but all the more reason to have a safety net.
Iona said one of the reasons we need the Lisa is that it takes into account the aspiration most young people have to own their own home – rent is typically 41% of average pay packet, mortgage is 19%. For Melissa, the Lisa might be an opportunity not just to save but to find out about investment. Over the long-term you can create a good fund by riding the wave of the stock market, and it might be worth looking at options including online robo-advice
Karen called to say she was considering investing in a pension for her grandchildren. Chris and Steve thought it was a no-brainer, but Iona said it depends on how much money you have available, because people might have other family demands in future such as funding for university.