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Aged 50 and no retirement savings? Here's what you need to do
There are millions of over-50s who either have no pension savings at all or not enough. All is not lost, but cobbling together a retirement income will require some considerable sacrifices.
Very few of us save enough for retirement and most people will fall short of the ideal target of a pension of two-thirds of final salary. Even worse, there are millions of over-50s who either have no pension savings at all or know that they don’t have enough.
We don’t save enough
A recent study by insurer MetLife Europe showed 64% of over-50s either believe they do not have enough savings put aside for a comfortable retirement or are not sure.
Even more worrying, around a third of workers in this age group also admitted that they had not even started saving for their retirement. Of those who have saved, few have saved enough.
MetLife warned that a man retiring at 65 who wanted a private pension income of £10,000 a year would need to accumulate a pension pot of £235,000, while someone who wanted an income of £50,000 a year would need to have saved nearly £1.2 million.
How big a pension pot do you need?
So how do you work out what savings you will need to reach your target pension income, taking into account the State retirement pension? Using current annuity rates every £100,000 of pension savings would generate annual income of £6,745 for a man, £6,406 for a woman at age 65.
So a couple with current income of £50,000 a year wanting a retirement income of half their current income - plus the State retirement pension, (currently £97.65 a week or approximately £5,000 a year per person, assuming both partners have a full National Insurance contribution record) – would need to accumulate a pension pot of roughly £400,000. This would give them pension income from savings of around £25,000 a year plus £10,000 a year from their State pensions making a total of £35,000 a year – just over two-thirds of their pre-retirement income.
Accumulating a pension pot of £400,000 will clearly involve considerable sacrifice now and is almost certainly unrealistic. So if you are one of the one in three over 50s who have so far saved nothing, how much will you have to save from now on to reach a pension pot of, say, £200,000 by age 65 - or 70 if you are prepared to delay retirement by five years?
How much to put aside
According to Laith Khalaf, pension expert at Hargreaves Lansdown, ‘a 50 year old would need to save £940 a month to reach a pot of £200,000 at age 65. This assumes 5% growth after charges and 2.5% inflation. That’s £11,280 a year, or 22% of salary,’ he says, something of a tall order, particularly if you still have children in full time education and you are paying a mortgage.
‘The reward is a £200,000 pension pot which would provide an RPI linked income of £8,400 at age 65, on top of the State pension of say £8,000 (Basic and Additional-now payable from age 66) that provides you with a decent level of income,’ he says. Admittedly, Khalaf has opted for an RPI linked pension which is more expensive to provide. But this is still an income starting at only £16,400 a year when the breadwinner has been bringing in £50,000 a year.
Strain on finances
For many, saving £11,280 a year out of income of £50,000 what put a severe strain on their current standard of living – even taking into account the fact that tax relief at their highest rate paid would be available on the contributions. If they delayed retirement for five years, to reach £200,000 at age 70, our 50 year old would need to save £660 a month, or 16% of salary. The £200,000 pot would produce an annual RPI linked income of £10,110 from age 70.
‘There is time to build yourself a decent retirement income from age 50 onwards, but you need to save hard to do it,’ says Khalaf. ‘However I suspect that someone age 50 earning £50,000 would have accumulated some pension saving over the course of their employment. I also suspect that if you drilled down into the one third of over 50s who have no pension provision you would find that proportion is populated mainly by those on lower incomes, part time workers and women who are relying on their husband’s provision.’
Pension consultant Keith Churchouse comes up with very similar figures. To produce a pension pot of £200,000 starting to save at age 50 and retiring at age 65, ‘assuming a 5% a year compound return, then a person would need to contribute approximately £10,500 a year gross (£875.00 per month gross, £700 per month net of basic rate) from age 50 to age 65 to achieve their objective,’ he says.
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