When you heard the pension announcements in the Spring budget, what did you think?
Were you cracking open the champagne at the thought of being able to pay in £60,000 a year and build a pot of well over £1m? Or were you, like most people, slightly uneasy about how spectacularly high these sums feel — leaving you wondering whether you were supposed to have built more of a pension by now?
In reality most of us are nowhere near this.
The average pension pot is currently around £37,600.
Unfortunately, we can’t rely on averages, because this falls well short of even the bare minimum we need in retirement, so it’s worth getting to grips with what we need — and how to get there.
A useful rule of thumb is the Pensions and Lifetime Savings Association, which says that to scrape by, a single person needs to have £12,800 a year and a couple £19,900.
However, this means squeezing all the luxuries out of life. If you want a few whistles and bells — like a two-week holiday in Europe, and a second-hand car, a single person will spend £23,300 and a couple £34,000.
If you want to do a bit more travel, go out for meals, or decorate the house occasionally, a single person will spend £37,300 and a couple £54,500.
You can use this to work out an approximate target. Then you can get hold of the paperwork which shows how much you have saved so far, and what you’re currently paying in, and run it through a pension calculator. This will show you the income you’re on track for, and how much you need to boost your contributions to hit your goal.
It may come as a nasty surprise. The Hargreaves Lansdown Savings & Resilience Barometer shows only 42% of people are on track for a middling level of income — which drops to 39% among millennials and 33% among Generation Z.
It might, therefore, reveal that you need to boost your monthly contributions to something you can’t even begin to afford. But don’t let this put you off — you still have options.
If you can’t afford to pay in more today, you can make plans for the future. One of the easiest ways to increase your contributions is to wait for the next pay rise, and before you have chance to get used to the extra cash, allocate a chunk of it each month to your pension.
You can also think about how the money in the pension is invested. If you don’t make a decision about this, you’ll be put in a fund that’s designed to be middle-of-the-road — and includes shares and bonds to spread your risk.
Younger people might consider putting more of their investments into funds with more exposure to shares, because over the long term they tend to have more growth potential.
And if push comes to shove, you can retire later. This doesn’t have to mean doing a job you hate until you drop. You can consider phasing retirement, and finding a role you’re happy to do on a part-time basis as you get older.
None of these options may feel particularly attractive, but all of them are better than getting to retirement age and suddenly realising you don’t have anything close to the amount of money you need for the retirement you want.