Charles Goodman considers the vexed question of how much anyone should save into their pension and concludes the government first needs to define roughly what a reasonable retirement income looks like.
As a corporate adviser, employee presentations give you an insight into how different people view pensions. In the current workforce, understanding of pensions is still low with little – in my experience – separating factory floors from equity houses.
Most are unaware of income tax relief or the very real differences between their automatic enrolment-compliant money purchase schemes and the DB schemes of legend.
The most frequent question from the congregation and in private interactions is how much should I save? When I first sat in such a presentation as a young shelf stacker in Sainsbury’s, the answer was half your age and that’s the percentage you should save. Proclaiming this as the presenter now only ever seems to elicit a shocked response.
At 18, depending on how your employer determines your pensionable earnings a 9% total contribution fits in with the Government’s 2019 auto enrolment target amount. There is, however, no guarantee this is what you are going to get. It will not happen automatically until you are 22 and earning enough – at which point according to our aforementioned rule, you should be contributing a total of 11%.
In fact, the reality in a shop floor retail job is you are more likely to be enrolled at 22 on a total contribution of 8%, and this amount will only be based on your ‘qualifying earnings’ – that is, those above £5,824.
For the rest of the room, that sinking feeling can only be grimmer. In the back row I can see the 40 and 50 year olds either privately grimacing or smirking at each other like they were on the school bus. “Did he just suggest I contribute 20% of my salary?! Doesn’t look like he has kids.”
Back at the front, I’m standing there thinking: “I’m 34 now – if I hadn’t started paying into a pension would I convince myself to put 15% of my income away, with a 2% top up contribution from my employer?”
When facing hard truths, I find the human mind has a fascinating way of defending itself with optimism. My ‘personal pension’ defence goes along the lines of: “I’ve been contributing since I was 22 … I’ve always matched what the company’s offered … I’ll take a bit more risk for more return on my investment … I’ll own my own house by then … I can give up the season ticket … mum and dad will leave an inheritance … I will have been saving into ISAs for rainy days … the company will reward me with shares … and, anyway, my thrifty, younger, wiser wife will still be the breadwinning lead partner of a big four accountancy firm.”
The first two points are fact while the final one is probably my most realistic hope of a ‘comfortable’ retirement. But when I look at what I have to show for 12 years of comparatively high contributions into my pension pot, the resulting amount looks fairly pathetic.
Positively I still have a long way to go – at least 30 years, probably 35. Plenty of time to build a bigger pot, to make home ownership a reality and set up that direct debit for my ISA. I should breathe easier, feel OK and remember there are a crowd of people waiting for me to continue this presentation.
The answer I gave on how much someone should save is that it is actually very personal. Trying to break it down to a simple formula is pretty risky – not just because you could under or over shoot expectations, but because you could create a sense of the impossible before an individual has even started.
But is there a simpler answer? Well, whether it realises it or not, the government has given it a go. Automatic enrolment may have been the nudge we all needed to save but, quite unintentionally, it will lead many to believe that 8% or 9% is going to be enough for a reasonable pension.
Expectations failed
I suspect, like me, the government’s reasoning is that these amounts sound far more palatable than 11%, 12%, 20% or 25%. Yet I believe it will probably all end in tears when the resulting pots – particularly for those restricted to qualifying earnings – fail to satisfy expectations.
For me, this is the question the industry and government should be focusing on. No plan is going to work or enjoy true engagement without a realistic goal, let alone one already weighed down by the current brand status of pensions. From an industry perspective, half your age really does not cut the mustard any more – and neither does it give people a target to focus on.
If employers are not willing to subsidise guidance and if most individuals are not willing to pay for advice, technology and mass education seem to be the obvious solutions. Providers and public bodies supply calculators, but having recently reviewed them for a client, I have found they are either unwieldy or overly complex. I am yet to feel there is one that will answer the question of how much I can realistically afford and show me multiple scenarios so I can make an informed choice.
Mass education is coming, slowly trickling on to school curriculums and being promoted to the same priority as physical wellbeing within corporations. There will still be many at smaller employers who miss out.
If these things are not made more widely available and we continue on the ‘nudge’ directive approach, the government needs to define roughly what a reasonable retirement income looks like. For a plan to be a success it needs a goal. Defining the target, I believe, will define the contributions.
Charles Goodman is an employee benefits consultant at Mattioli Woods
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