Many younger people now rely on the bank of Mum and Dad to help get them on the housing ladder. As well as being a useful source of funds, they may also have some important life lessons to impart when it comes to saving towards a more secure financial future.
Recent research among the over 50s by the insurer Aviva found that half regretted not starting a pension earlier, while almost two-thirds said they wished they had saved more into their retirement savings.
Unlike their parents, those embarking on careers today have the benefit of auto-enrolment pensions, with employer contributions once they earn more than £10,000. The ten years since auto-enrolment started has seen much greater participation in pensions from those starting their careers.
Start work, start contributing to a pension
Building pension savings from the beginning of your working life can make a significant difference to the size of your eventual pension pot, not least because contributions made early benefit from longer periods of investment growth.
A quarter of those surveyed had delayed starting a pension until they were in their 30s. Many parents said they had prioritised mortgage payments and securing family finances ahead of making contributions to a pension plan.
Minimum auto enrolment levels could leave pension funds short
However, financial experts warn that parents’ advice is not always correct when it comes to how much needs to be saved. A quarter of those aged over 50 think that putting 5% of earnings into a pension will be enough to fund a decent retirement. Retirement experts tend to disagree, stating that minimum auto enrolment levels (currently 8% with 3% of that coming from employers) is likely to leave people with insufficient funds for long-term retirement and social care.
The Pension and Lifetime Savings Association has argued that minimum levels should be increased to 12% of earnings, to help provide for a more comfortable retirement.
The Retirement Living Standards, based on independent research by Loughborough University, have been developed to help us to picture what kind of lifestyle we could have in retirement. This can be found at www.retirementlivingstandards.org.uk.
A single person will need about £12,800 a year to achieve the minimum living standard, £23,300 a year for moderate, and £37,300 a year for a comfortable lifestyle. For couples, it is £19,900, £34,000 and £54,500 respectively.
Minimum, moderate and comfortable levels of retirement
A ‘minimum’ lifestyle covers all your needs, with some left over for fun and social occasions. You could holiday in the UK, eat out about once a month and do some affordable leisure activities about twice a week.
A ‘moderate’ lifestyle provides more financial security and more flexibility. You could have one foreign holiday a year and eat out a few times a month. You’d have the opportunity to do more of the things you want to do.
A ‘comfortable’ lifestyle allows you to be more spontaneous with your money. You could make more regular upgrades to your home, a much larger annual clothing budget and three foreign holidays a year.
While the minimum auto-enrolment levels are unlikely to change anytime soon — particularly given the current cost of living crisis — where possible, younger workers should up their savings and ensure pension contributions increase in line with any pay rise. This should help protect against the same financial regrets when they reach their parents’ age.
With inflation at its highest for over 30 years, it could be argued that even higher pension contributions and more effective retirement planning will be of benefit to help you fund retirement income above those quoted.
As chartered financial planners, Armstrong Watson Financial Planning & Wealth Management, work with you to build your retirement plans and regularly review these so you know if you will remain on track. We can use cashflow forecasting to allow you to understand your plan more easily so you can make informed decisions, and the type of retirement you’re aiming for.
Please get in touch if you would like to discuss your plans for retirement with a member of our financial planning team.
