Articles - Am I saving enough into my pension?


Working in the pensions industry, this is probably the question I get asked the most. The problem is it’s the hardest question to answer for the majority of people in DC pension schemes. Saving into a pension isn’t like saving for a holiday, a car or even a house deposit. All of those have a definite cost (a house deposit might fluctuate a bit) and once your savings are equal to that cost you can make a purchase.

 By Dale Critchley, Policy Manager, Aviva

 But how can you ever save enough for retirement? How much is ‘enough’ when we have no idea what life will be like. You could be fit and healthy and live for 40 years. Or you could become ill and only have a few years of retirement to fund. The likelihood is we’ll be somewhere in between.

 One thing I can be sure about, most people are not saving enough. The misunderstanding, and in some cases mistrust, of pensions means that people are not putting away an adequate amount to live on in later life. Building up a decent pension pot requires years and years of regular saving and the magic that is compound interest.

 We have been going through auto-enrolment for the past five years which has been great in some respects – seven million more people are now saving for their retirement. But it’s not so great in other respects – a large proportion of these are saving the minimum 1% of salary set out by the legislation, with an employer top up of 1%. Anyone saving at these levels who thinks their retirement is now sorted is in for a bit of a shock

 But there are plenty of people who do think that way. Aviva’s recent Working Lives Report found that 40% of private sector employees believed that they would be able to live off the savings they made through auto-enrolment, with 12% thinking it will provide a comfortable retirement and the remainder believing it will be enough to get by on. If getting by means making do and doing without then some of these people could be right, but I think most people aspire to something better than being a poor pensioner.

 Given the audience for this article, there will be an appreciation that there is no simple answer; there is no formula for figuring out the optimum amount to save to have a decent pension in retirement. We have tried - deterministic modellers have been replaced by stochastic modellers but both rely on an element of engagement and a range of assumptions. In the majority they also assume uninterrupted future employment which paints an overly rosy picture for those upon whom caring responsibilities weigh most heavily.

 A quick answer is to revert to rules of thumb. As part of our auto-enrolment pre-review Aviva developed the following:
 1) The 40 year rule: Aim to start saving 40 years before your target retirement date
 2) The 12.5% rule: Aim to save 12.5% of your monthly salary towards your retirement
 3) The 10 times rule: Aim to have saved 10 times your annual salary by the time you reach retirement age

 While none of these are accurate for everyone they don’t try to be. 5 pieces of fruit and veg won’t keep you fit but the mantra points you in the right direction, and it seems achievable. The same has to be true when we talk to people about pension contributions.

 Automatic enrolment provides a huge nudge to encourage people to make the most of their workplace pension. It should be easy to recommend that people maximise whatever employer contributions are on offer, with the aim of hitting the rules of thumb.

 As for the question ‘Am I saving enough into my pension?’

 The answer for most people is probably not, but at least with rules of thumb the questioner can be pointed in the right direction.

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