AT the end of a crazy year, all we can do is think about the future.
There will come a time when this virus will be a distant memory. So let’s not take our eye off the ball here – let’s keep saving, and keep planning, particularly for our retirement.
Here are a few tips for managing our personal pensions, and anticipating possible changes to the state pension, that may give us an idea what the picture could look like in decades to come.
Work out how much you’ll need: Which? Money did some number-crunching this year and proposed the minimum pension savings needed for retirement.
For a ‘comfortable’ retirement, their opinion is that a couple need £169,175 in their pension – this will be enough to pay for all essentials, run a car, and have a European holiday each year. For a ‘luxurious’ retirement they would need £456,500 in their pension, which would do all the above but also allow long-haul holidays, regular restaurant dining, and a new car every five years.
Of course, it’s on a sliding scale, and you could aim for any amount in between. The important thing is to know what you want, and plan ahead.
Work out if you are saving enough: if you are aiming for the comfortable retirement model, Which estimate a couple starting saving from age 20 would need to contribute £213 per month between them; if they put off saving until age 40, this would rise to £384 per month. For the luxurious retirement, a couple would need to contribute £570 per month from age 20, but if they delay until age 40 this would rise to £1,030. In saving for your pension, the motto always is: save early and often.
Check where your personal pension is invested: your pension savings are invested by pension fund managers, mainly in investment funds. However, reports by investment researcher Tilney Bestinvest shows that a record 150 investment funds in the UK have fallen short of their growth targets by 5 per cent or more, for three years in a row.
Industrial downtime during lockdown hit energy stocks and financials particularly hard, two of the main engines for growth in many funds. These under-performers include some of the largest funds on the market, and if your savings have been placed in one or more of them, you are missing out on growth you could have had. We can look to see where your money is invested, and if necessary switch you into better-performing funds, and turbo-charge your savings growth.
Don’t count on the pensions triple lock: moving now from personal pensions to the state pension, back in 2010 they introduced the triple lock, which guarantees to increase state pensions every year by one of three measures: either the rate of inflation, the increase in average earnings, or 2.5 per cent, whichever is the greater.
The idea was to make sure that pensioner income was not eroded by the gradual increase in the costs of living. However, they almost immediately switched from measuring inflation by the retail price index (RPI) to the consumer price index (CPI), which is typically around 0.7 per cent lower.
Now they plan to make further changes by adding owner-occupier’s household costs into the CPI (and renaming it CPIH), although not for at least five years yet. In 2017, Theresa May pointed out that the triple lock’s handy guarantee would cost £45 billion over 15 years, a ripe cherry for picking by any Chancellor looking to cut costs post-Covid. It all adds up to more uncertainty.
Some experts believe that, rather than scrapping the triple lock completely, they might modify or suspend it for a few years as a temporary measure. Mind you, income tax was brought in as a “temporary measure” to fund the Napoleonic Wars in the early 1800s - and, well, it kind of stuck.
Know what your state pension will give you: the Organisation for Economic Cooperation and Development (OECD) looked at the various state pensions in developed countries around the world. They revealed that the UK state pension will pay out, on average, just 29 per cent of the average wage.
This has earned it the unflattering title of ‘pensions misers’, right at the bottom of the pile behind even Poland and Mexico. Compare this to high scorers like the Netherlands and Turkey, both of whose state pensions provide a ‘replacement rate’ of 100 per cent of the average wage.
None of us has a crystal ball, or know for certain what the future holds. But one thing we do know: life’s better with a plan, and the end of the year is just the time to make one.
:: Michael Kennedy and Shaun Doherty are independent financial advisers and pensions specialists, and can be contacted on 028 71886005 . Further information on Facebook at Kennedy Independent Financial Advice Ltd or at www.mkennedyfinancial.com
