Recent reports suggest that defined contribution (DC) pension pots could be a third lower than they should be at retirement. According to the Financial Reporter, current “lower for longer” investment growth could mean the 8% minimum contribution rate needs to increase to 12%.
A separate report by PTL, a governance services provider, worries that DC forecasts are failing to take important factors into account. The result, according to Institutional Asset Manager, could be an unpleasant surprise for retirees who had thought they were saving adequately, but find too late that their pension fund is insufficient.
At the Pension Planner, we specialise in putting strategies in place that help our clients to live their dream lifestyle in retirement. We do this by getting to know you and your financial situation, understanding your goals, and putting realistic and achievable steps in place to get you there.
Here’s how the Pension Planner can prevent you from having a nasty shock in retirement, but, first, a closer look at the survey results.
Changes in the way we live could mean previous pension models are outdated
PTL suggest the calculations that decide whether a DC pension is adequate do not accurately reflect more recent changes in the way we all live.
They state that social and lifestyle assumptions are outdated and point to three key areas where this is the case:
1. The decline of homeownership
Homeownership is in decline in the United Kingdom, falling from 70.9% in 2003 to 63.9% in 2018. Private renting has risen during this time.
As retirement approaches, many pensioners will find that they are close to paying off their mortgage. They might even use some of their pension to clear a remaining debt. This means that the whole of their pension income from that point can go on maintaining their desired standard of living.
The potentially higher costs of rent, however, don’t end when retirement arrives. PTL suggests that paying rent into retirement is an additional cost – paid by an increasing number of people – that isn’t factored into current DC pension models.
2. Rising educational debt
Treasury figures, published in the Guardian, confirm that outstanding student loans reached £140 billion last year.
The debt, and any remaining interest, is written off 30 years after graduation. But PTL points to the “myth of the graduate premium”, suggesting that working toward a degree could mean a break in saving for the future, leading to underfunded pensions in retirement.
3. Long-term health costs
According to figures published by Which?, care home fees increased by more than 3% in 2019/20 compared to the previous year and they continue to rise. Factoring in the cost of later life care is an important part of retirement planning, as is thinking about what you will do with the funds if they aren’t needed for that purpose.
We at The Pension Planner can help with this so get in touch if you have any questions.
Should the 8% minimum auto-enrolment contribution rise to 12%?
LCP state that falling investment returns could leave more than 10 million workers with insufficient pension funds. Their report found that those who planned to save 8% into their pension a decade ago would now need to pay half as much again to realise the same size pot.
With the minimum auto-enrolment contribution currently at 8%, the report asks whether a rise to 12% is needed to plug the gap.
A pension plan unique to you
At The Pension Planner, we get to know all our clients, building a picture of your lifestyle now and the one you want to live in retirement. We will then take a holistic view of your financial position and set out a plan that works for you.
Here are a few important points to remember:
- Make the most of your employer’s contributions
Paying into your workplace pension means that you benefit from tax relief, compound growth and the contribution made by your employer. If you can afford to pay more than the minimum contribution, great, but, if not, paying 5% will mean receiving an additional 3% from your employer.
- Holistic financial planning will take all your finances into account
The plan we put in place for your retirement will involve realistic and manageable contributions into your pensions and investments, designed to help you attain your goals.
We can use cashflow modelling to factor in ongoing costs such as rent and student loan repayments, as well as helping you think about future costs like later life care.
We’ll also keep track of your funds through regular reviews, ensuring they are performing as they should.
- The hard work doesn’t stop at retirement
The Pension Planner will continue to support you even after your retirement date has passed. We can help you manage your income in retirement to make sure you don’t run out, and that the withdrawals you make are taken as tax-efficiently as possible.
Get in touch
At the Pension Planner, we can take your entire financial circumstances into account to build a long-term retirement plan aligned with your goals. Email email@example.com or call 0800 0787 182.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.