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Thanks Dad! for starting me on my first pension
How much should you save in a pension? Greg Kingston, the man who lived on the state pension for a week, had a shock finding out.
by Michelle McGagh on Aug 31, 2012 at 12:51
Greg Kingston (pictured) knows a thing or two about pensions as he works for Suffolk Life, a company that provides self-invested personal pensions (Sipps), and he used to work as a financial adviser.
However, even those people working in financial services need reminding about the need to start saving early and saving often – even if the amounts are small.
Living on the basic state pension for a week recently was the kick-start Greg needed to look at his own pension savings to make sure that he can live the life he wants in retirement.
We put Greg in touch with Arthur Childs, managing director of Arch Financial Planning, an independent financial adviser in Guildford, to make sure Greg was on the right track.
Here’s what Arthur found:
Name: Greg Kingston
Age: approaching 40
Wants to retire: 68
Greg’s plan: He plans to retire at 68 but continue working part-time for a couple of years. Although he has aligned his retirement age with the impending increase in the state pension age he is assuming the state retirement age will continue to rise and does not expect to receive a state pension until age 70. Greg would like to own properties in two countries in retirement and split his time between them.
Ideal retirement income: £35,000 a year
Minimum retirement income needed: £20,000 a year
Pension savings: Greg has £36,000 in a company stakeholder pension into which 20% of his salary is contributed by his employer each month as part of a salary sacrifice scheme. He also has £38,000 in a Sipp. A combined total of £74,000.
What he’s saving: Greg saves 20% of his salary each month.
The goal: In order to fulfil his retirement ambitions Greg needs to save at least £500,000 in today’s terms.
What the expert says:
Arthur (pictured) said the milestone birthday of 40 is a good time to assess your retirement plans because there is still sufficient time to make changes that can positively impact your retirement, leaving it another 10 years and any changes won’t have enough of an impact.
‘This is an important time [for Greg] to be considering whether he is heading in the right direction to meet his retirement goals. He has picked up the point that relatively small sacrifices today can make a bigger difference to retirement income. This works best if the lesson is learned as early in life as possible,’ said Arthur.
Arthur said Greg’s retirement date is ‘late but realistic’ and agreed with the idea of working part-time in the first two years of retirement. ‘This is an excellent plan and takes away something of the shock to the system of stopping work altogether. It also gives Greg time to adjust to his new financial situation,’ said Arthur.
Saving 20% of salary may seem like a lot, Arthur called it an ‘acceptable level’ for someone approaching 40, but said Greg would need to increase his saving to 25% of salary if he is to reach his retirement goals of £35,000 a year.
Greg has 75% of his Sipp money invested in higher risk emerging markets funds and his stakeholder is also invested in high-risk funds. Although Arthur said investing in risky funds now is fine, Greg should think about reducing the risk levels in the 10 years before retirement.
Greg is not just saving through a pension, he is also putting aside money into his company’s different share save schemes. In the ‘partnership scheme’ £75 is taken from his gross salary each month and £20 is matched by his employer. He saves a further £250 per month into a save-as-you-earn (SAYE) scheme but does not see this as part of his long-term savings.
Arthur recommended looking not just at pension saving when determining retirement income but also savings and investments squirreled away elsewhere.
‘Rather than simply use pension plans to build up funds for retirement I would always recommend a two-pronged attack for pensions, that is, to make use of general investment as well as pension plans,’ he said.
How is Greg doing?
According to Arthur’s calculations, Greg is not going to hit his ideal income of £35,000 a year in retirement. He is on course to receive £25,000 a year.
‘The shortfall could be fully addressed if Greg were to put a further £450 per month in his pension funds. The real cost to Greg of this additional contribution would be £337.50 per month as Greg would receive 40% tax relief [on his pension contributions] in due course,’ said Arthur.
‘This is not such a drastic increase as Greg is already saving £250 per month through [his employer’s] SAYE scheme that we have ignored for his pension funding.’
Arthur said Greg should plan a ‘steady increase’ in contributions over the next five years until he reaches 25% of salary, then move to 30% of salary when he finishes contributing to the SAYE scheme.
‘One quite frightening fact is that Greg’s future pension contributions at 20% of his salary over the next 28 years will only provide a pension of the same value as the £38,000 that is currently invested in his Sipp and assuming that no further contributions are added to it,’ said Arthur.
‘This is the result of compound interest and it shows how vital it is to build up pension funds as early in life as possible.’
What Greg says:
‘Having had time to reflect longer on the living on the state pension project, I’m more determined to do what I need to now to avoid reaching retirement and find that I’m short. Like most people though, I need to prioritise the demands on my income.
‘£450 per month is a lot to lose from my disposable income. It means that I’m going to have to plan quite differently for the next few years but overall I think it will be worth it. The money might be gone for a while but it is still mine and there’s no doubt I’ll need it in the future fare more than I need it today.’
Greg said the fact that the £450 extra saving each month will not catch up with the £38,000 he already has in his Sipp is ‘sobering news’.
‘That pension came from my first job and I remember my Dad telling me, almost forcing me, to join my company pension scheme. I did what I was told. Suddenly I wish I’d saved a few more pounds per month all those years ago. I’m eternally grateful for the financial advice I received, even if it didn’t come from a financial adviser. Thanks Dad!’
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