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Can young people really afford to save 15% of their wages?
We've calculated just how much the average worker would have left in their pocket if they saved the recommended 15% of their salary into a pension.
by Michelle McGagh on Mar 08, 2016 at 14:21
Workers have been told they should be putting 15% of their salary into a pension but if you’re earning an average wage of £26,000, is there enough to save?
A Labour party-commissioned report, the Independent Review of Retirement Income, has told workers they need to save 15% of their salary if they stand a chance of retiring with a decent pension.
The author of the report, Pension Institute director David Blake, has even called for a 15% ‘national savings target’ to be set by the government to encourage people to make adequate preparation for their retirement.
While it’s fine to talk about a 15% target in principle, the reality of implementation may be far more difficult. The fact is, with rising rents and house prices, as well as utility bills that creep skywards, many people cannot afford to save this much.
While keeping in mind that averages aren’t a perfect science, we’ve examined just how much the average worker would have left in their pocket if they saved 15% of their £26,000 into a pension. Spoiler: it isn’t a lot.
Starting point: £26,000 a year, or £2,166.67 per month before tax.
Let’s assume our worker has a big chunk of student debt hanging over them and of course, there’s the 15% contribution into the workplace pension.
Blake doesn’t envisage the worker paying in the whole 15% - equal to £325 a month. At the moment, auto-enrolment contributions are set to rise to 8% in 2017, made up of 4% employer contribution, 3% employee contribution and 1% tax relief from the government.
Blake said ‘there could be employer resistance to doubling their [contribution] rate’ and that the 15% would be made up of 8% employee contribution, 5% employer contribution and 2% tax relief.
An 8% employee contribution would be equal to £173.33.
And for a person earning £26,000, student loan payments would be £68.
After paying tax, student loan and pension contributions our worker would be left with £1,523.77 a month to live on (thanks to Listen to Taxman’s online calculators).
Cost of living
Now we know the amount the average worker has to play with, let’s see how much it costs them to live.
You need a roof over your head and we’ll assume our worker is renting. According to landlord agency HomeLet, the average rent in the UK is £739 a month.
Our worker needs to get to work and weekly commuting costs, according to the Office of National Statistics spending report, totals £15.30 a week on average across the UK. Four weeks x £15.30 equals £61.20 a month.
Gas and electricity
If your bills aren’t included in your rent then you’ll have to pay for your own gas and electricity. According to Ovo Energy, the average energy bill for a small house or flat equals £784 a year, so £65.30 a month.
Another essential utility is water and uSwitch estimates the average water bill totals £393 a year in the UK, or £32.75 a month.
There is little information on average council tax paid in the UK. However, the Department for Communities and Local Government’s figures show the average cost of council tax for Band D properties in the UK is £1,484 a year. Split over 12 months, the cost is £123.66 per month.
Most people have a television and will therefore need a licence. In fact, if you don’t have a TV but watch BBC iPlayer’s catch-up service, you’ll still need a licence thanks to a closing down of a loophole.
This adds another £12.12 to your bills each month.
There are few people who do not have a mobile phone these days and it’s likely that you’ll have not just a phone but a data package included in your contract. According to Ofcom, the telecoms regulator, the average monthly cost of a mobile phone and data package is £44.37.
The prime minister last year said that fast broadband was to become a legal right for everyone in Britain, so let’s add that into our worker’s costs. Figures from Ofcom show the average person pays £13.44 a month for broadband.
The cost of living for our very average person totals: £1091.84.
But let’s not assume our worker wants to rent forever and that they have aspirations to be a first-time buyer. In that case they would be wise to set up a Help to Buy ISA (individual savings account), as the government will contribute £50 for every £200 a month that you save.
Total savings per month: £200.
How much is left?
Let’s remind ourselves how much the average worker had left after tax, pension contribution and student loan had been paid: £1.523.77.
Now let’s minus the average cost of covering the basics (£1091.84), which leaves our worker with: £431.93.
And because they want to own their own home at some point, we’ll take away their deposit cash (£200): £231.93.
This means our worker has to make the remaining £231.93 stretch to cover food, going out, presents, holidays, and hobbies.
While saving 15% of salary for retirement is the right thing to do, the fact is the average person may not be able to make their money reach that far, especially when more pressing, current needs – like purchasing a property – are weighing on their minds.
In fact, for some it may come down to making the choice between a property or pension. For Dan Wilson Craw of the Generation Rent campaign group, the figures are proof of the need to fix the housing crisis in the UK, which means young people cannot afford to have it all.
‘Young people are being pulled in all directions - not only do they have to save more to buy a house, they have to put away more for a pension,’ he said.
‘At the same time they're paying so much on rent some can't even save anything at the end of the month. Policymakers need to accept that if they want to make the pensions system sustainable, they have to fix the housing crisis.’
More about this:
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- How long can babyboomers expect a 'free lunch'?
- What's inflation? The battle to get young people to save
- Should young people save for their pension or a home?
- How pensions can help solve the housing crisis
- Pension Awareness Day: why the young need to save now
- Renting in retirement: young face lifetime under landlords
- House deposit dream turns under-30s on to ISAs
- Old vs young: who is more prepared for retirement?
- Are pensions the right way for young people to save?
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