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Pensions: how much should you save?

The vexed question of how much to save for retirement has reared its head once again with a controversial report suggesting that rational investors should not start saving into a pension scheme until after age 35.

Pensions: how much should you save?

The vexed question of how much to save for retirement has reared its head once again with a controversial report from academics at London’s Cass Business School maintaining that rational investors should not start saving into a defined contribution pension scheme until after age 35. Even more controversially they go on to suggest that from the age of 55, you should be saving one third of your salary.

The real problem with saving for retirement – which everyone seems to ignore – is that unless you are an above average earner, or you don’t marry and acquire dependants, most people cannot possibly afford to save for retirement until they have finished educating their children. And even then, parents are often called upon to help with adult offspring’s housing costs.

Impossible to save

A family with one earner and two children on the average wage in London and the south east of around £30,000 a year will be hard pressed to survive, let alone save for retirement. For most families, mortgage repayments, travel costs, basic utilities like gas, electricity, telephone and TV, plus food and education costs such as school uniforms, more than eat up all their disposable income.  Unsurprisingly, most have credit card debts or personal loan commitments.

Mortgage repayments on a £120,000 loan, even at today’s low rate averaging around 4%, will eat up some £640 a month out of take home pay of £1,896, plus around £63 a month tax credits and £146 child benefit. There will also be utilities bills, now averaging around £1,200 a year or £100 a month, plus council tax at around £1,200 a year which takes up another £100 a month. 

Travel is a major item of expenditure. For example an annual season ticket from Luton to London’s King Cross costs £4,232 or £352 a month – and that doesn’t take into account ongoing tube or bus fares to the office. These basic costs eat up £1,192 a month leaving just £913 a month to pay for food, clothing, running a car, household and life assurance and holidays and Christmas. There is no way the average family can afford to save for retirement.

Pension costs

Pension providers and those with a vested interest constantly remind us that a person needs to save on average around 15% of gross earnings throughout their working life to retire on anything like a decent pension. This is simply out of the question for millions of families – which is why the Cass report suggests that people shouldn’t expect to start saving for a pension until they are in their thirties. Even then it will still be impossible for many families.

The Cass report is simply setting out what we know – that young people save for a deposit on their first home and can’t afford to put money away for a pension. It isn’t until later life – possibly their fifties, when children have grown up and earnings have peaked – that families may be able to afford to save for a pension. But even that is dubious given the massive increases in the cost of further education. And the Cass suggestion that people should save a third of their salary from age 55 is probably unrealistic for most. 

‘There is a huge amount of irrational behaviour,’ said Professor David Blake, director of the Pensions Institute at Cass and one of three co-authors of the report. The Cass paper found that to maximise pension saving, ‘surprisingly, it is not optimal for individuals to start contributing to a pension plan until several years into their career. This is because individuals’ incomes are initially low and they are better off consuming their incomes rather than saving from them.’ Clearly paying off debt and saving for the deposit on a home are top priority for most.

According to the Cass report the optimal contribution rate, ‘increases steadily from zero prior to age 35 to around 30% to 35% after age 55.’ But reality does creep in when Blake admits, ‘I doubt that most people would have the willpower to maintain such high contribution rates towards the end of their working lives.’

Few would disagree with the suggested investment strategy advocated by the Cass report which is that 100% of early contributions should be invested in equities (or a diversified growth fund), with bonds being introduced later. It advocates an equity holding of 20% to 50% at retirement, when the bond holdings are sold and ‘phased annuitisation’ should begin.


Not surprisingly there has been considerable criticism of the Cass report from both pension providers and advisers. In an ideal world we would all earn enough to allow us to pay off debts incurred as a student, save for the deposit on a home, finance the high costs of having a family, and save for retirement. 

But pension providers and the government seem to ignore the reality – that many millions of families barely survive. Figures from Standard Life in a report, Your Commitments, Your Future, point out that people aged 35 to 44 are under the greatest financial pressure, spending on average £1,208 a month on financial commitments including mortgages, debt and general household bills.

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25 comments so far. Why not have your say?


Sep 13, 2011 at 12:49

What Lawson says is correct to a point because we know the longer an efficient equity is held, the better its performance. The issue is, what is an efficient equity?

There is no point in buying a fund and leaving it there. It's a waste of time and money.

It is better to actually have a financial "coach" or guider than simply putting money here and there. Most people who struggle to live within their means are unaware of the basics when it comes to price comparisons, where to spend etc. etc. No wonder because the stresses of having to work, bring up a family and seek promotion leaves next to no time to do owt else.

The sad fact is, this simply highlights the obvious . . . the rich are getting richer whilst the poor are getting poorer.

Pensions should mainly be implemented by high rate tax payers or those who expect to receive a reasonable inheritance.

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Sep 13, 2011 at 12:55

If people can't live off £30k pa when working, how do they expect to manage on £10k (for a couple) in retirement?

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John Fowles

Sep 13, 2011 at 13:36

My youngest is self employed without a pension plan. I have been banging on for years that he should start one.Reading the article it looks like he has done the right thing, albeit by default. BTW, he will be 40 next frightens me that he hasn't got a plan !

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Sep 13, 2011 at 13:53

I've been saving into various schemes for 10 years. Achieved very little growth, basically without the tax uplift it would be a complete waste of time. Apparently the dividends are re-invested back into the fund but the process is very opaque.

Only fund managers make money from personal pensions. The rest of us will be lucky to break even on contributions.

It's all very well saying 'you must pay into a pension' and 'you must have a pension plan' but when there's no guarantee that you'll see anything at the end of it people will invest elsewhere, such as property.

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Tony Peterson

Sep 13, 2011 at 14:07

Everyone is better off by ignoring crooked "pension plans" and buying income producing assets (shares and property) whenever in their working lives they can afford it.

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David Harvey

Sep 13, 2011 at 14:13

I have to wonder what the effect of the pension reforms have had on young peoples thinking about this if retirement plans of the over 50's can be turned on their head overnight. The other thing is the austerity policies and the poverty being created. Most will be thinking about the here and now, a roof, food and heating, pensions will have to wait!. This is what austere is, "Having no comforts or luxuries; harsh or ascetic" . But who is it true for? it's the working masses I'm afraid, and in years to come when this legacy comes back to bite us all yet again they will get the blame for not taking care of their future.

I saved money, but, may now be put out of work in my late 50's and will probably have to spend it to live because despite our leaders hype about industry wanting older people they really don't. Then I will be told I didn't think about my retirement!!!

It wasn't until people began to have surplus income that industrial growth really took off. We have people running the country who have no clue at all as to what a poor person is or, for that matter the 3rd world being formed from elderly people right beneath our noses and yet out of sight.

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Anonymous 1 needed this 'off the record'

Sep 13, 2011 at 14:22

Pension plans are fine for anyone earning over £30,000pa, as for the rest it is up to the Govt. to provide, as tax rates make it impossible for people earning less than this to save.

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David Logan

Sep 13, 2011 at 14:31

sgjhaghsdg is exactly right about managing on the state pension which will be about 1/3 of typical earned income. Lorna makes the point about other higher priorities when younger which is fair enough for most of the things she mentions. But I am afraid essential expenditure for young people I know now includes financing many £1000s per annum on cars, clothes, holidays and electronic gadgets. If done soon enogh a small slice of this cash +tax relief would fill the gap and help towards a comfortable retirement.

It is all about choices

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dr ray

Sep 13, 2011 at 14:42

For many people saving for a pension is a waste of money. All they will achieve is making themselves ineligible for means tested state benefits and possibly liable for the new care home tax which is being proposed.

On the other hand its possible that the existing state benefits for the elderly will cut further so the answer is to save " off the record" and keep the pension industry and the governments hands off your savings. A regular purchase of gold coins would do it.

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Anonymous 2 needed this 'off the record'

Sep 13, 2011 at 15:07

or possibly magic beans....

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David Harvey

Sep 13, 2011 at 15:10

Yes, I think you are right dr ray. with interest rates like they are you are as well to put your savings out of the way I suppose thats what I should have done. I am getting some of those PV Panels to take advantage of the F.I.T. I hope that doesn't turn out to be a mistake.

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Sep 13, 2011 at 15:20

Tony Peterson - Are you so bitter and twisted that you haven't discovered self-select SIPPs? I have all my pension money in a TD Waterhouse SIPP, I pay £8.95 a trade, and I choose what I buy and sell, and do it myself online.

If you contribute into a pension you get tax relief at your highest rate - that is, your contributions are taken off your earnings before the tax liability is calculated. I wouldn't give up that amount of tax relief on a matter of principle.

ISAs are all very well, but you buy the ISA assets from taxed income.

Buying assets outside an ISA or a SIPP has no tax advantages at all.

But it would appear from another Citywire thread that you're in a public-sector scheme anyway - is that a "crooked pension plan"?

For once, words fail me . . . . .

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Sep 13, 2011 at 15:31

@ Tony Peterson - You clearly have no idea what you are talking about! If you are a 40% tax payer and invest £100 into a personal pension this will get invested as £167 after the tax relief, that is a 67% return without any investment growth! If a 50% tax payer £100 out of your back pocket will get invested as £200, a 100% return! What other investments come close to this day 1? And if you have a SIPP you can more or less invest in what you want....

I suggest you do some research!

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dr ray

Sep 13, 2011 at 15:52

MT and Maverick. I don't disagree with your comments on tax relief on contributions but the income from a pension is taxable (largely) and whether the tax relief increases the value of your pension by 67%, 100% or 1000% is irrelevant if you can't access the money (or most of it anyway). The 25% tax free sum is an advantage for previous retirees but I don't expect it to still be around if I ever live to draw a pension.

Still, it must be satisfying to have the largest pension plan in the cemetery!

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Tony Peterson

Sep 13, 2011 at 15:59

MT and Maverick

I think you will find when you come to retire (as I have) that these cunning plans that you think are so brilliant are not quite as brilliant as you hoped they would be. Ask a few others who have come to the end of similar cunning plans.

Ask those coming up to to, or just beyond, retirement how pleased they are with the entitlement they are starting to claim or expect to claim. Ask about their annuities. Ask what inflation will do to those annuities.

Also I suggest that you calculate how much of those wonderful sounding tax breaks end up in the accounts of your providers before your retirement, after your retirement, and after your death.

And by the way, I am not bitter and twisted at all. I made a pile out of direct investments. My small public service (6 years contributions) and private pension (17 years contributions) are a joke in comparison. I am just trying to be helpful, in an amused way. Some people clearly do not want to learn from the experiences of others. Your choice.

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charlie 12

Sep 13, 2011 at 16:35

A number of interesting points from some people, each with their own particular approach to funding for retirement. The important point (to me, that is) and perhaps flies in the face of the article, is that to do nothing is not an option. Whether sipp, personal pension, ISA, pooled investments, direct investments or a sock under the bed - it's up to personal choice. However, funding the latest phone, Sky TV, football season tickets and the rest of the "must have" paraphernalia in place of some forward thinking while still pleading poverty can only end in tears.

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Sep 13, 2011 at 16:40

Hello Tony Peterson. Long time no speak!

I see you have been making friends again with your off-the-cuff remarks about what may be right for you being right for everyone else. Let's be honest. Those who have the time to self manage their money and make speculative guesses are neither (in their decision making) overly successful consistently, nor all that rich. High earners do not have the time or knowledge to self manage their investments. Funny to see some fund managers cross managing their portfolios with their colleagues. Doctors don't tend to treat their own family. The reason is that the human rarely practices what they preach.

Yes, pension funds run by insurance companies have been shambolic and some people should avoid them at best. But the more you earn (say over £100k), the more you should put into pensions as part of a tax mitigation and wealth accumulation strategy. Whether it is self-managed or through an adviser is up to the individual.

It has taken you a while still to realise that it is indeed about giving people choice. Most do not have the time or knowledge to decide what, and how to go about doing what's best for themselves. [had to repeat this in case you forgot my previous statement].

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Tony Peterson

Sep 13, 2011 at 17:11

Hello again TA,

The problem of providing for retirement is, of course, not a one-size-fits-all affair, I admit.

And the problems are different, not only for each generation, but for each decade. Probably for each person too.

However, at an almost philosophical level, I think it extremely ill-advised to surrender control over surplus income in response to tax bribes, no matter how good they look superficially. If you are lucky enough to live long enough to enjoy real benefits from your pension plans you will pay the tax break back.

I would be very grateful if some recently retired persons joined in the discussion and gave us the benefit of their experiences with their maturing plans and their benefits, and how delighted (or otherwise) they are with the rewards reaped by their forward planning, and how inflation is likely to affect them henceforth.

Anyone out there willing to help?

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Sep 13, 2011 at 17:32

Charlie 12 - spot on. People claim they can't save for a pension but pay wads on Sky subscriptions and frequent car updates. I'm doing a combination of pension, S&S ISAs, ILSCs, cash, ITs and direct equity holdings. I don't have a Sky subscription and I run cars until they are well over 10 years old. I intend to retire at 55.

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David Harvey

Sep 13, 2011 at 17:49

There are a number of people who believe that if everyone stopped buying things and put all their spare money into pensions that the world would be better. I wonder what would happen to what little industry there is and then to the pensions and the money from money brigade if we all did.

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Sep 13, 2011 at 18:34

Hi Tony, i retired last febuary, i was in a final salery pension, i retired age 63,

worked for company 29 years did get promoted over last say 6 years,my salery

when i retired was , £21000, pension recieved, £6800, i had paid into avc, i was offered £950,per year,from company, i shopped around for the best avc and best offer was £1559, per year which was much better, and now i pay tax,

but i have always been into stocks and such,in peps & self select isa,s

and i thank god for that, as someone said to me many years ago. dont get the tax man on your back, how right he was, only saying this as tony said like to hear from new retiree,

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Graham Barlow

Sep 13, 2011 at 18:54

For the last 15 years the Private Pension Funds in Britain have been under attack either by Politicians or eroded by poor investment performance. The dividend income has been taxed and interest rates have plummeted to below inflation, The underlying incentive psychology has been severely eroded. The population has been paying National Insurance for years and are now told you can't have the state pension until you are 67 years old, because the actuaries say we are all living too long. No wonder those that can redirect their capital resources into property where the yield is still very good compared with any pension fund . Those who can manage their own pension savings will be the winners in the long run, and land must be part of the portfolio. Gold should also play a part as this metal has become the new fully transferable currency, and the price in these conditions will go on rising.. If you have a reasonable property that lends itself to letting rooms ; a well selected .house trained quiet lodger ,bringing in Tax free income, is not an unbearable cross to bear. In fact it could be very conpanionable. People will have to think outside the box to build some on going income to supplement any wretched hand out of our money from the state.

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Tony Peterson

Sep 13, 2011 at 18:55

Thanks for your contribution HETTIE 1.

It will obviously help that you were in a final salary scheme. When, in about ten years time you reach my age, you may be surprised by how much your own investments in peps and isa's have overtaken your annuities.

I wish you well for a happy and enjoyable retirement.

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Robert Court

Sep 14, 2011 at 00:49

You can make a HUGE commitment to your future by investing 50% of your total disposable income; the first few years could be horrendous but you should be on an increasing income for life as your investment income (of which you also reinvest 50%) will eventually overtake your earned income and then you can sail happily into the sunset eating that packet of Golden Wonder crisps you always lusted after but decided you couldn't afford on 50% of the pittance you were earning so long ago!

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Truth Sayer

Sep 17, 2011 at 06:58

All paper investments are being destroyed. Bonds and Many shares will be decimated in years to come. Any pension plan without substantial gold, silver and commodities will be next to worthless.

I hope there are no public sector workers reading this. Even with gold and silver there is a catch. If their price rises significantly from these levels, it will imply great social upheaval. If that is the case, pensions will be the least of our worries.

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