THIS week I’d like to share one of my favourite proverbs.
“He who is resting on his laurels is clearly wearing them on the wrong part of his body.”
Last week we talked about how, as a nation, we are saving more effectively and ‘adequately’ into our pensions than we once were. Perhaps that improvement has left us, as a nation, feeling a little smug – perhaps we are ‘resting on our laurels’. Here’s why.
It depends on your definition of what is ‘adequate’. At Scottish Widows they believe you are saving adequately only if you are putting at least 12 per cent of your salary into your pension. How are you doing?
Well, back in 2013, less than half of us (45 per cent) were saving adequately for our retirement, according to Scottish Widows.
But then, with auto-enrolment and a general ramping up of workplace pension saving, things took a turn for the better, and today 55 per cent of us now qualify as adequate pension savers. That’s the national average though, some areas are doing better, some are doing worse.
Here in Northern Ireland the local figure is 52 per cent, and while that’s a great improvement over 42 per cent back in 2012, it still means that almost half of us are still not saving enough to ensure a decent retirement.
It is, therefore, still essential to at least consider the prospect of a personal pension as a second or even third strand of retirement income.
Auto-enrolment, for all its virtues, has only partially addressed the problem. Yes, it means that nearly 80 per cent of younger people in their 20s are now saving something for their retirement, but the levels of their saving still fall short of the mark.
Minimum contributions this financial year are 5 per cent of qualifying earnings, of which at least 2 per cent must be paid by your employer. In April 2019, this rises to 8 per cent of qualifying earnings, of which at least 3 per cent must be paid by the employer.
However, it’s still a long way short of the 12 per cent that we define as ‘adequate’. One in five young savers (20 per cent) are still ‘seriously’ short of the 12 per cent target, say Scottish Widows, and more than one in five (21 per cent) are not savers at all – they have not yet set up a pension.
This is why there is currently a government proposal to lower the minimum age for auto-enrolment from the current 22 to18. Those 21 and under, and earning at least £6,032 a year, can opt in to their pension scheme, but it is not automatic – and many are choosing not to do so, which means they are missing out on those valuable employer contributions.
Even those 22 or over are not auto-enrolled if they are earning less than £10,000 a year – which penalises the ‘multi-jobbers’ - those who may have more than one job - or the low earners.
Not surprisingly, Scottish Widows is calling on government to consider upping the minimum contribution to that magic 12 per cent that they believe constitutes ‘adequate’ saving.
Even at that, we would still lag behind many other European countries. No wonder the Swedes have one of the best standards of retirement living in the world – Swedish workers pay 16 per cent of salary into the state pension system alone, and that’s before saving into any personal pension they may have.
So let’s not be lulled into a sense of false security by talk of how in Northern Ireland we have improved in pension saving.
And let’s not forget that on the state pension side, figures from The Organisation for Economic Cooperation and Development (OECD) tell us the UK has the worst state pension of any major country in the world.
A UK worker’s state pension and other benefits mean that, on average, income drops to just 29 per cent of previous earnings when we retire. Compare that with the OECD world average of 63 per cent - or with the generous retirement incomes of 80 per cent of previous salary in Italy and the Netherlands.
This is why Scottish Widows and many others believe we need to stop looking at the past, and set the bar high for our targets in the future. We still have a lot of hard saving to do, and the first step is taking quality, independent pensions advice.
Act now! You can’t be a cabbage, if you want to retire like a Swede.
:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005 . Further information on Facebook at “Kennedy Independent Financial Advice Ltd” or at www.mkennedyfinancial.com
