23rd September 2013
Millions of savers could be setting themselves up for a less than overwhelming standard of living in retirement as the vast majority of those under the age of 45 are clueless to the current value of their pension writes Philip Scott
According to research from insurer Standard Life, almost 75% of under 45s with pension are not aware of the total value of their nest-egg or the level of income they will receive from it when they stop working.
The news follows bleak research from HSBC last week which showed that a worrying one five Britons anticipate that they will never stop working as a result of not having saved adequately.
The Standard Life survey also discovered that just a quarter, at 26%, of under 45s with pensions know what their pots are currently worth and just one in five or 21% say they know what income they are expecting when they retire. Furthermore, a third already have more than one pension pot.
Standard Life’s Alistair Hardie says: “Our research shows that most of us do not really know the value of our pension until we are older and in the run up to retirement, despite the fact that we are likely to be receiving annual pension statements. The problem is that by not keeping a close eye on our pensions in the earlier years, we run the risk of falling behind and leaving any top ups until the last minute, when it may be too late to catch up.
“Alongside our homes, our retirement savings are likely to be one of our biggest assets. So by not keeping track of the value of our pension pots and how they are performing, we may be missing out on opportunities to take action and really are leaving ourselves vulnerable at a later age.”
Read more: Crackdown on poor value workplace pensions
Standard Life’s research has also found that over two fifths of people, at 43%, in the UK with pensions have two plans or more, typically built up over time as they move jobs while around a third of the under 45s with pensions already have more than one.
Following the introduction of auto-enrolment, the government is looking at how to ensure that pension pots will follow people as they move around jobs so in the future, they hope that people will not have this confusion of multiple pension pots. Hardie says: “Having multiple pension pots must make it more difficult for people to get a clear picture of the total value – and it could also be why people totally lose touch with their pensions. Consolidating their pots could help and is something to consider.
“When we consolidate our pensions, we have just one provider to keep in touch with and one annual statement to look at and review. Consolidating can also potentially mean we pay lower charges and possibly have more choice and buying power when we come to retire too. For example, pension drawdown is generally not an option if we have a smaller pot, but combining pots could change that. A larger combined pot could also help us find a better rate when we choose an annuity.”
WHAT DO PENSIONS SAVERS NEED TO DO?
Be clear on what your goals are for retirement
Look at how much money you will need and how you can best achieve that amount. It is hugely important to start saving for your retirement early in order to maximise the time your money is invested (see table below for sample outcomes). In addition, keep track of your pension savings, so you know to top up earlier on if you realise you are not saving enough to achieve your goals. Do not forget to take the state pension into account when you work out how much extra income you will need.
Where are you invested?
Make sure your money is invested in the funds that reflect your attitude to risk. Keep this under review particularly as you get closer to the time when you intend to retire because at this point you want to protect your savings and be in less volatile assets than shares, such as cash and bonds.
Keep an eye-on the ‘Lifetime allowance’
There is a maximum which you can save into your pension pot. And for those lucky enough to hit the limit of £1.25m (from 6 April 2014) be wary of potentially breaching this limit, as there is a hefty tax charge involved. In addition, remember the Lifetime Allowance may reduce further before you’re ready to take your pension.
Look at your tax band
Remember that in most cases if you are a basic rate tax payer, for every £80 you invest in a pension, it is automatically topped up by £20 tax by the government. If you are a higher rate tax payer, then you can receive higher rate tax relief on your contributions. Do not miss out and remember to claim this through your tax return. If you are investing through your workplace, these payments are deducted from your salary before tax.
Consolidate your pension plans
If you have more than one pension plan, then consider bringing them all together into one pot to make it easier to see how your pension is doing. But before doing so, make sure you are not giving up important benefits such as defined benefits, ‘with profits’ bonuses and enhanced tax-free cash. Consolidation may mean lower charges and you could also benefit from a discount for having a bigger pension pot.
How much do you need to save?
Based on a 22 year old and a 35 year old saving into an auto-enrolment pension scheme at the default contribution rate of 8%, supplemented by a full state pension entitlement. The figures below from Hargreaves Lansdown show the drop in income as they make the transition into retirement at age 68, as well as the additional contributions they would have to make if they want to hit their target replacement rate income in retirement.