Don't be an ostrich and 'sleepwalk' into retirement
DID you know that ostriches sleepwalk?
We all know that the ostrich is a large, ungainly flightless bird – but in financial services, the term has a second meaning.
To financial experts, ostriches are those who have their head buried in the sand, and don't notice the world evolving and changing around them.
It's what many of us do, regarding our retirement planning. I suppose it's perfectly understandable, considering our hectic lifestyles.
“My pension will look after itself, as long as I keep up the contributions.” That's what we assume. But as a newspaper editor once said: “When you assume, you make an ass of u and me.”
Our friends at Aviva also worry about ostriches, and if you are one of the 9.8 million workers who have been auto-enrolled into a workplace pension since 2012, well, last week Aviva have said they doubt that all will necessarily turn out well in the end.
Their new figures show that workplace pension contributions started out well, but things are evolving and changing, and contributions have rapidly fallen to the minimum levels that auto-enrolment allows.
In 2012, contributions came in at a high of 9.7 per cent of salary, but by 2017 that had tumbled to 3.4 per cent.
In real terms, that means that a 22 year old auto-enrolled today would have an income in retirement equivalent to £6.55 per hour. Compare that to today's minimum wage of £7.83 per hour.
This is why Aviva says that by ignoring their pensions, our ostriches could be “sleepwalking” towards a retirement that leaves them on less than the minimum wage.
Now, minimum savings levels for auto-enrolment are to go up to 8 per cent next year. This will be an improvement, but it's still far from ideal, says Aviva.
They suggest that minimum contributions be lifted to 12.5 per cent by 2028, divided between worker, employer and taxman. This would raise our 22 year old's retirement income to the equivalent of £8.45 an hour. It's not exactly luxury, but it's a lot better than £6.55.
The real danger – and this has been highlighted by Aviva, Aegon, Scottish Widows and most of the heavy hitters – is that ostriches don't have the information or inclination to keep their eye on the ball, regarding their retirement. We're all much too absorbed in the here and now. But we have to remember: failing to plan is planning to fail.
To get the info and get the planning done, we need to take the advice of a qualified financial adviser, who can wave his magic calculator and tell us what we'll get from our pension, if we stick to our current contribution levels. Only then can we decide if we are saving enough!
By the way, ostriches don't really sleepwalk. They don't bury their heads in the sand, either – they're digging holes with their beak, to make a pit for their eggs. There's no charge for the nature lesson. But think about your pension.
:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005. More information on Facebook at Kennedy Independent Financial Advice Ltd or at www.mkennedyfinancial.com