In this week's blog: the minimum isn't enough when it comes to your pension

The absolute minimum - not the ideal

“Of course I’m ok to drive! I’m not over the limit….”

I stared at my friend sceptically (this was back in university).

He was technically right but I could see that he wasn’t totally steady on his feet. Some people are like that.

And I was certain he shouldn’t get behind the wheel.

But he was equally certain: the Government guidelines said that adult men can drink two pints of normal-strength beer before they’re over the limit – and since he hadn’t had that, he was safe to drive.

In the end, I got him into a taxi, and everyone lived to see another day.

But I still sometimes think of that incident when I’m at work, because there’s a surprising lesson here for anyone who cares about their financial future.

You see, the Government and other organisations routinely set standards around health, food and finances.

For example, they tell us how much our kids should weigh before moving into a car booster seat…

…how much fruit and veg we should eat each day….

…and what the minimum wage should be.

These aren’t necessarily ideals.

They’re just the bare minimum or maximum necessary for your safety and health.

So, that doesn’t mean that if your kid weighs 22 kg, it is always right or safe for them to start using a booster…

Or that if you’ve eaten your 5-a-day, you can stop. (There are plenty of studies showing that’s not enough.)

And it certainly doesn’t mean that if your employer pays you the minimum wage, you can live on it!

The problem is, people don’t look at these guidelines like that.

These minimums and maximums become the norm, and people trust that they’ll be okay as long as they stick to them…

…just like my friend was certain he could drive because he hadn’t hit the Government’s alcohol limit.

Which brings me neatly to your finances…

…or more precisely, your pension.retail-piggybank

Here, too, the Government has set some basic standards.

Under auto-enrolment rules, all employees pay a minimum of 5% of their earnings into their pension, and their employer contributes an additional 3%, for a total of 8%.

Note that word – minimum!

That is the smallest amount the Government thinks you should be paying, so that you don’t live in complete penury later in life.

It’s not an ideal – far from it.

In fact, if that’s all you contribute, chances are that you will have a stressful retirement.

Obviously the amount you put into your pension will depend on many very personal factors.

But to put things in perspective, a recent Which? report concluded that if you want anything more than a basic retirement, with an occasional luxury like a long-haul flight or a new car every 5 years…

…you’ll need £42,000 a year – or a pension pot of £502,775.*

That’s pretty difficult to achieve, with an 8% contribution.

Assuming that you consistently earn £70,000 from the moment you start working until you retire (which is unlikely, but let’s go with it), you would have to save for a whopping 90 years to generate that amount!

Not live 90 years – work 90 years!

In other words, it’s not doable.

You can play with the figures depending on your real income and the retirement you’re looking for, but we deal with high-earners every single day, and the truth is that almost everyone will struggle if all they’re saving is 8%.

Unfortunately, I also come across people every single day who sincerely believe that their retirement is safe because they are auto-enroled and meet the Government’s 8% rate.

It’s a false sense of security.

What they’re forgetting is that the Government is desperately trying to increase contribution rates by people who have saved literally nothing… Or 1%... or 2%.

When that’s the case, 8% is a massive leap forward.

But it won’t provide you with the comfortable retirement you dream of (or need).

It’s just the absolute minimum, not the ideal.

So if you have been counting on your auto-enrolment contributions to finance your retirement, get in touch with one of our financial advisors today.

We’ll help you work out exactly how much you need to finance the retirement you want, and then work backwards to figure out what your annual contribution must be.

We’ll also discuss how else you can finance your retirement, if those figures seem out of reach. (There are always options, but it can take a professional to see them!)

You can get in touch with us here.

* Source: Which survey. Annual income figure is reliant on investment performance and cannot be guaranteed

Posted by Peter Selby

Topics: Insights & Advice, financial planning, Retirement

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