How would you cope if you had to live in old age for 10 years after your retirement savings had run out?
There may be other savings and assets to provide an income, like buy-to-let property or defined benefit pension schemes, but beyond those you’d have only the State Pension to rely on - presuming you’re entitled to it.
This deeply worrying scenario is exactly what new analysis from the World Economic Forum warns the average UK saver faces. In a white paper called Investing in (and for) our future the Forum looks at savings levels in several large economies and models how well prepared citizens in each are for retirement. It presents this by calculating how much longer savers will live past the point their savings have been spent.
For the UK, the worrying figures are that British men are on course to last 10.3 years longer than their savings, while British women fare even worse, lasting 12.6 years longer. The difference is explained by women living longer and saving less as a consequence of lower pay and taking time out to have children.
This is a high level snapshot and based on broad assumptions - for example that retirees will live on an income in retirement worth 70% of their final working salary - but it highlights an issue that will affect millions in the future who will have little beyond their own retirement savings to provide for them in retirement. If it’s any consolation, many other countries face an even steeper challenge - Japanese men are expected to outlast their savings by 15.1 years and Japanese women by 19.9.
The Forum goes onto make various recommendations for governments hoping to overcome this challenge. Individuals can do many things to help themselves, however. None of these measures are surprising - saving more and saving earlier, for example - but taken together they can have a powerful positive affect on your saving - and they don’t have to hurt along the way.
The most powerful tool available to savers is completely free - time. Compounded returns, getting interest on your interest, is what can turn modest savings into something worthwhile, but the process needs time. Even if you worry the money you’re able to save is too small to make a difference, remember that saving and investing is a habit - once you start, you’ll be in a position to do more.
And if you worry it’s too late to make a difference, it isn’t. Five or ten years of concerted savings can make a dramatic difference and remember that your retirement itself may last 25 or 30 years - that’s a long time for investments to deliver returns.
Get help from the tax man…
If you’re saving for retirement a pension is likely to be the best place to do it because your contributions benefit from tax relief. A boost equivalent to any basic-rate tax paid is automatic, while the extra available to higher and additional rate payers is either added automatically or else claimed through a self-assessment tax return.
A good way to look at it is that it costs a basic-rate payer £80 to make a £100 pension contribution, while a higher-rate taxpayer pays just £60 for the same effect and an additional-rate taxpayer pays just £55.
Contributions are allowed to build tax-free and then 25% of the pot can be taken with no tax due and income tax payable on the rest. The biggest benefit comes when your tax rate in retirement is lower than in your working life.
… and your boss
People who work for a company can usually benefit from an employer paying into a pension for them. Some employer contributions may be automatic but beyond that you may be required to make contributions which are then matched by your employer. Ask the administrator of your scheme what it would take to maximise the help on offer.
Keep an eye on cost
Investing fees can make a big difference. Just like your investment gains, the effect of fees is compounded over time and even a difference of less than 1% a year in your overall costs add up to a big difference over years and decades.
Understand what percentage amount you are paying in fees and drive this down where you can.
Set a target
If you know your target it will be easier to hit. Fidelity’s retirement savings guidelines provide a set of simple ‘rules of thumb’ to show you whether you’re retirement saving is on track.
If you have to suddenly start diverting a large share of your salary into a pension, it will be painful. If you start with a more manageable proportion, and increase this over time, it’s a lot easier to bear.
Start with an amount you can handle and aim to steadily increase it. Even quite small increases add up over time. For example, a 30-year-old earning £30,000 could contribute an extra 1% of their salary and then retire at age 68 with an extra £55,345 in their retirement fund.1 Used wisely, that money could fund a year or more of retirement on its own.
The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.pensionwise.gov.uk or over the telephone on 0800 138 3944. Fidelity's Retirement Services also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.
More on saving for retirement
In the latest episode of MoneyTalk I explore making your money last in a world of rising prices
1 Fidelity, based on salary growth of 3.75% each year and investment growth of 5% each year.
The value of investments can go down as well as up so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.