Few savers put enough cash aside to fund a comfortable retirement, but studies suggest this is because most people don’t understand how much they need to save in the first place.
For anyone interested, there are plenty of surveys explaining the figures, but five key numbers lift the lid on the problems of saving for retirement most people face.
The average worker retires with a pension pot of £61,897, says the Financial Conduct Authority (FCA).
This pays an annual income of just £2,500 and when taking the state pension into account, leaves someone with an annual income that’s below the minimum wage!
Costs and penalties
On average, a retirement saver currently pays £2,700 into a pension each year, says HM Revenue & Customs. This could add up to £81,000 over a 30 year working life – but excludes any fund growth.
Only half of retirement savers (48%) take professional financial advice about how to spend their pension cash when they stop working, according to the FCA.
Many are put off by the cost of advice, which can average as much as £3,000 even for savers with modest pension pots, consumer watchdog Which? found.
Savers can put too much into a pension only to find their funds are swallowed by HMRC penalties.
The main pitfall is the lifetime allowance (LTA). The LTA is how much a saver can put into pensions during a lifetime, with a current ceiling of £1.055 million. Go over the limit and savers face paying 55% of the excess amount above the LTA to the tax man.
Last year, savers handed £185 million in penalties to HMRC for breaching the LTA.
Savers are taking too much money, too quickly from their pensions. This is called the withdrawal rate, and the FCA says the current rate is 8% per annum.
This means taking a meagre £4,000 a year as income from a £50,000 pension pot will wipe out the fund in around 12 years.
Compare this to the expected time men and women will live after 66 years old and a big funding gap arises. Men can expect to enjoy a 17.6 year retirement, while women can look forward to 19.9 years, data from the Office for National Statistics suggests.
A better target withdrawal rate is between 2% and 4%, says the FCA. However this means that in order to provide an income equivalent to the National Minimum Wage £1363.70 GBP Per month ( £16,364.40 GBP per annum) then at 4% withdrawal a saver would need to have something like £409,110 GBP to ensure the pot never runs out. Compare this to the £81,000 average lifetime savings and you can see there is a very clear Savings Gap.
Contact your PS & Partners adviser today to find out how you could save tax, increase growth and investment opportunities and ensure you retire in comfort and discuss enhancing your pension with QROPS, SIPPs and QNUPS options and talk through the pros and cons and whether these options would benefit you personally.