The main question of course is how much; what income is needed to live on in retirement? what does one need to put aside and what fund is required to sustain that income? It is a little like how long is a piece of string, but one can have a good guess and come up with some reasonable answers.
Starting with the easy bit, what income?, if you take your latest pay slip, or slips for a working couple, then take pay after all deductions, including pension contributions, deduct mortgage costs, estimate work and children costs and that is what you are basically living on at present.
One needs to work in real terms, that is today’s living costs and assume income and savings value match inflation, to readily understand and relate the figures, as one is looking at long time scales of 40 to 60 years.
There are many figures available on what income is spent and required to maintain an adequate living standard and we shall deal with the lower end at and above the welfare level, as the rest tends to take care of itself. This is not directly related to wage level, at the average part time wage of £200 per week, £10,000 pa, the normal 50% i.e. half final salary is below the poverty level.
Of course the final income depends on living styles and age, if you retire at 55 with some 20 years of active life you will want to travel and spend on hobbies, sport, leisure activities etc., at 65 to a lesser extent and 75 and above this expenditure can reduce substantially. A comfortable level has been put at £14,000 pa.
We have the absurd position that the basic State pension is currently £102 pw, but the minimum the State says a single person needs to live on (Pension credit) is 30% higher at £130, effectively the poverty level.
It is proposed to increase BSP to £140 pw but do away with the State second pension and SERPS, which would make National Insurance contributions meaningless. The basic problem is that BSP is treated as a charitable State benefit and not as a working right and therefore degraded beyond benefit levels.
Effectively all pensioners will live below the poverty level unless they make savings / contributions for an additional pension now being introduced as the NEST scheme later this year, basically paying twice for your pension. This is a defined contribution scheme with no guarantees and traditionally poor returns with an expected PYF of 1.9 well below inflation proofed values at 2.4.
On the average female wage of £20,000 pa, contributions at 8% will be £1,600 with an expected pension of £3,000, even at 4% return it should be £5,700 and at 6% should be as high as £9,000. However contributions from NI are almost the same amount, doubled by Employers yielding £5,300, so there must be a better way.
This will be explored in the next blog with a radical new approach to pension provision.
Savings Annuities Public Sector NHS Teachers Police Local Government Hutton State Pensions
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