Aged 40 or younger? The chances are there will be no State Pension by the time you retire. The pension liability is a big black hole the public purse could do without – the UK Government is committed to paying in excess of £7 trillion to people either already retired or currently working.
Wiping that kind of liability off the Chancellor’s books would be a welcome move for any political party; and there are many industry insiders who suggest the implementation of auto-enrolment, the system that ensures every employer provides their staff with a workplace pension, paves the way for the scrapping of the State Pension.
For the moment, this may all be nothing more than rumour – but even if the State Pension is guaranteed ad infinitum, it is not enough to secure a comfortable retirement. Last year, the Government introduced a new flat-rate State Pension of £155 a week – for those who qualify. Many will end up with less, not having paid sufficient years of National Insurance contributions. We are also living longer, and the quality of our later years is vastly better than that of previous generations.
According the Office for National Statistics a 65-year-old man today could expect to live to almost 84 years, while a woman of the same age could expect to reach her 86th birthday. With life expectancy improving by around six years every two decades those aged in their 20s and 30s now should easily live past 100. Could you live on £150 a week for three decades?
Saving for the Future is Critical
So you’re on board with the theory of saving for your retirement – but the reality is hard to stomach. Present bias is basic behavioural science; human nature prefers instant gratification to delayed reward. Saving for a deadline decades in the future is simply not as appealing as saving for a holiday, or even a medium term goal such as a house. But the longer you delay saving for retirement the more onerous the task.
Figures from Hargreaves Lansdown reveal that a 30-year-old on £30,000 needs to invest 15% of their earnings to be able to enjoy a pension of a third of their salary, £10,000, allowing for inflation. But if you leave starting to invest until age 40 and you need to save 21% to achieve the same level of income.
“Most people are unable to afford to pay what they need to into a pension from day one, life gets in the way with other priorities,” explained Hargreaves' Danny Cox. “However it’s never too early to start saving something into pension and over time these regular contributions add up. Regular saving into income investments have the added benefits of the reinvestment of dividends which further boost the growth potential, helping to build oak trees from acorns.”
Free Cash Now – Or Double the Money in a Pension?
The launch of the Lifetime ISA has understandably been well received by young professionals. From April this year, those aged less than 40 will be able to take out a Lifetime ISA. Qualifying savers can put up to £4,000 a year into this new ISA, and for every £4 they add, the Government will put in a further £1 – boosting their pot by up to £1,000 a year.
But while this free cash is an excellent incentive to save, there are concerns it will put off savers from investing in their pensions.
“Choosing to invest in a Lifetime ISA rather than a pension is an additional choice that some employees will benefit from – for example, if this genuinely gives them the boost towards a house purchase or brings them earlier into saving than might have been the case,” said Debbie Falvey, of Aon Employee Benefits.
“However, many could end up worse off if they make the wrong choice on where to invest their money. Many employers offer generous contributions under their pension schemes and are currently unlikely to offer similar compensation under an alternative Lifetime ISA.”
In short – the Lifetime ISA may get topped up by the Government, but your workplace pension gets topped up by your employer and the Government. Contribution top-ups have greater growth potential too; the more you save, the more your employer and the Government will contribute in line.
This is not to say the Lifetime ISA does not have a place in your savings portfolio – but it should not be considered a replacement for long-term investing.
Tony Stenning, chairman of the Savings & Investments Policy project added: “The introduction of the Lifetime ISA is a welcome addition, but Brits should question whether they are over relying on cash and consider building their savings through stocks and shares investments as well.”
