Personal pension: Moneybox explains the benefits
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A financial planning expert spoke exclusively to Express.co.uk and laid out how much Britons will need to keep up their standard of living after they finish work, broken down by yearly salary. He also explained exactly how a standard £25,000 earner can give themselves ‘an excellent chance’ of reaching their retirement goals.
James Norton, Head of Financial Planners at Vanguard offered his insight on the uncertain subject of retirement planning, and provided some firm answers on how much Britons will require. He said of calculating how much one will need in retirement: “It’s perhaps the toughest question for any saver because so much is unknown, not least how long you will live.
“By following some general principles, though, it’s still possible to plan ahead effectively – whether you seek to do it yourself or with expert support from a financial adviser.
“Setting realistic targets is key. Just what your own target income should be will depend on your personal circumstances. But one thing is probably clear: even if you qualify for the full new state pension, currently £9,339.20 a year, most of us will have to rely on our own savings to provide an adequate income in retirement.
“The good news is that you may need less than you think to maintain your current standard of living. Many costs that were deemed essential before retirement often change or fall away when you retire.
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To get an idea of how much of their pre-retirement income a retired person would need to maintain their existing standard of living, Vanguard has looked at two key factors in most people’s spending funds when they are working but less so when they retire – the money they save and the money they pay in tax.
“The more you save when working, the less you have available to spend – but also the less you’ll need to match similar levels of spending in retirement. Retirement may also mean moving to a lower tax band. Thus, you need less money to arrive at the same net total,” Mr Norton said.
Vanguard calculated how much three different people who habitually divert 10 percent of their gross earnings to their pension would need in retirement.
Someone who earns £25,000 per year before retirement would need £19,963 to live an equivalent lifestyle after they finish working. For a person who earned £50,000 each year, this goes up to £37,963 to maintain the same living standards in retirement.
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Finally, a pensioner who earned a yearly salary of £100,000 whilst they were working would need to have annual income of £71,803 through their various state and private pension pots in order to live the same way they did before retiring.
Mr Norton explained the tax one pays and the rate at which they save may well be just part of the story, as there may be other potential changes to one’s financial circumstances that must be considered, such as work income, regular expenses, lifestyle expectations, and savings accounts.
He said: “Once you’ve factored in all these elements and established your desired income target, the next big question is how to get there.
“Unfortunately, low interest rates mean a cash savings account is unlikely to be enough to build your pension. Although you could lose money, a stock market investment in shares and bonds is more likely to generate the growth necessary over the long term.”
To analyse what the average person should do to achieve their retirement goals, Mr Norton used the example of a 25-year-old earning £25,000 each year, who aims to retire at age 68, when he says their salary could be more like £60,000 in today’s terms.
Using his calculations, this person would need to retain £45,000 – around 75 percent of that final pre-retirement income – to maintain the same standard of living.
This would mean their pension would need to be worth around £507,000 when they retire.
So, how much would they need to put away in a pension?
“Let’s assume that their contributions (including their employer’s) total 12.5 percent of their salary or around £260 a month and that they build steadily in line with their projected income to about £625 per month,” he began.
“In addition to the mandatory eight percent that is automatically paid into their workplace scheme, this person diverts a further 4.5 percent of their salary into a pension scheme.
“Let’s also assume that their pension savings are invested in a globally diversified portfolio, with 60 percent in shares and 40 percent in bonds, and that they earn an average four percent a year after inflation across the whole time the money is invested.”
He concluded that this hypothetical investor would have an “excellent chance” (more than 85 percent) of achieving their retirement goals. Mr Norton also encouraged savers to “think about the level of contributions that you’re making to your pension that will give you the best chance of long-term success whilst being affordable.”
Mr Norton went on to remind Britons that they are not alone in the burden of retirement saving, as their employer will also chip in, and tax relief can also help to improve one’s pension pot.
He said: “While you contribute in five percent of your pay check, your employer will put in least three percent to your pension and the Government helps by giving tax relief on pension contributions up to £40,000 a year, assuming you don’t breach the lifetime limit.”
Finally, Mr Norton advised savers not to be daunted and to plan ahead for their retirement. He said: “Start saving early and set a realistic target. If you can keep to the path you have set, a comfortable retirement is an attainable prospect.”
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