How much will I need to retire: Planning ahead
Last week we looked at how much money people would need in retirement, and this week we ask the same question of younger people.
For people in their teens or twenties, retirement can seem like the furthest thing in their mind. After all, why worry about retirement when there is getting a reliable job, rent and other bills to worry about? Yet while it's true retirement is a long way away, it really does pay to plan for it from an early age.
Compound interest is the most powerful tool for any investment, and Money Advice Service explains that saving less but from an earlier age can more than double the size of a fund. Using the assumption that a 6% growth is achieved throughout:
- If you save £100 a month from age 25 to 65, you will have a fund of around £190,000
- If you save £200 a month from age 45 to 65, you will have saved the same amount of money but the fund will only be worth around £90,000
Encouraging the young to save
Of course, knowing that it's important to save doesn't mean it's easier to find extra money to put aside. However, the government has shown commitment to encouraging pension saving, and one of the most publicised pieces of legislation is auto-enrolment. Rolling out between 2012 and 2017, auto-enrolment automatically places workers into a pension scheme if they meet certain criteria, such as earning at least £10,000. Workers can opt out if they don't want to take part, but auto-enrolment helps young workers in particular get started with a pension, and employer contributions make it more an appealing option. Partly due to auto-enrolment, over half of 22-29 year olds in the UK are saving for their retirement.
One of the big hurdles to encourage saving is helping people to realise how much money they will need in retirement. As we explained last week in "How much will I need to retire: Approaching Retirement", between £180,000 and £200,000 is needed to receive a £10,000 annual income with an annuity, yet only 20% of respondents of YouGov's "Pensions and Investments 2013: Retirement Planning and Gender" report were aware of that. When asked how much money they thought would be needed in retirement:
- 12% were uninterested
- 12% thought under £100,000
- 11% thought over £600,000
- 24% were unsure but would like to know
Tracking pensions easily
The smartphone revolution has meant there's an app for almost everything, and tapping into this notion is the FCA's recent proposal for a pensions dashboard. Explaining that something similar is already happening with national insurance, the pensions minister Steve Webb said "we're digitising the national insurance records so that you'll be able to go to a website, see what national insurance you've paid ... and see what that'll do to your state pension."
The dashboard would allow people to login and see both their state and private pension. Not only would this let people see how much they've saved and how the fund has performed, but it could further encourage saving as people would consider their pensions more often, feel more in control and try to increase the value of their pension.
Pot follows member to end stranded pensions
One of the other recent suggestions is for a pension to follow a person when they change jobs. This is to prevent low value funds being stranded when a person changes jobs, and the initial suggestion is for any fund worth under £10,000 to be automatically transferred when a person changes jobs if a workplace pension is in place at the new company. Current estimates suggest that, if nothing changes, there will be 50 million stranded pensions over the next 40 years.
Currently, it is up to individuals to initiate a transfer from one scheme to another, and many fail to do this. If a fund is automatically transferred, contributions will continue to be made to it.
The big picture looks promising for young people: auto-enrolment means qualifying employees will receive a pension without having to remember to set one up (and those who do not qualify are allowed to opt in), and if they move jobs the pension will go with them. They will also have the ability to log into a dashboard and check the performance of their fund, encouraging more interest in retirement savings.
What do you think of the proposals? Let us know with a comment below.
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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new
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