2 months in……review over a coffee
In July we released the pensions calculator (check out www.pensionspenguin.com if you haven’t used it yet).
Prior to developing and launching the website we were frustrated with how complex and opaque pensions were. At Pensions Penguin our mission is to empower and educate people to better plan and prepare for their retirement. With that in mind, what has your feedback been over the last 2 months?
- First and foremost — Life expectancy has has really surprised people (in a good way!). It really is quite staggering how long we Brits are expected to live. If you select your age the pensions calculator forecasts your life expectancy*. To provide an example;
Women who are 21 today are expected to live to 90 and there’s a 1-in-10 chance that they’ll live to 104. If you retire at 68 (the age a 21 year old is currently expected to start receiving the state pension) you are expected to live 22 years in retirement. There’s also a good chance you could actually live much longer.
2. The earlier your start saving for your retirement the better. In prior articles we’ve discussed how pensions work and the magic of compound interest. Coupled with generous tax relief from the government and most employers offering to match your monthly contribution up to a set level (i.e. you contribute 5% and they’ll match it) there are compelling reasons for joining and contributing to your employer’s pension scheme arrangements from the moment you join the workforce.
In the screenshot above we showed a 25 year old man with a £32,000 salary. If he makes combined contributions of 10% per month then his pension is expected to last 33 years in retirement.
10% seems a lot right? Well not really. If his employer agrees to match his pension contributions each month he only need to contribute 5% from his pay cheque to get to a combined contribution of 10%. Also, that’s 5% of his gross pay he’s giving up (i.e. before tax). Assuming his employer offers a pension arrangement through salary sacrifice the contributions will receive relief from income tax and national insurance. That means that 5% contribution only results in a £93 reduction in his monthly pay check. That’s roughly £3.10 a day (i.e. the price of a cup of coffee!).
It goes without saying that we love coffee, we just love pensions and saving for retirement more.
3. How much do you actually need in retirement? Now this is somewhat subjective and based on each person’s individual preferences. That said:
The default assumption in the pensions calculator was to assume that people would retire on two thirds of their final salary. The rationale behind this is that we assumed you are a homeowner and will pay off your mortgage just before you retire. With no monthly mortgage payment, having a pension of two thirds of your final salary is, roughly speaking, expected to provide you with the same quality of life in retirement.
4. What is tax free cash at retirement? Someone contacted us to ask what this is. We agree that is sounds a bit confusing but this is actually a fantastic benefit offered to pension savers. To incentivise you to to save for your retirement the government allows people to take up to 25% of their pension pot (up to a total pot value of £1.055m for the 2019/2020 tax year) as tax free cash (the remaining 75% will be subject to income tax just like any other form of income). People are free to do whatever they choose with their 25% tax free cash allowance. Including: reinvesting it; buying a holiday home / caravan; going on that holiday of a lifetime; or whatever else takes their fancy.
In summary, our vision is for people to be aware of and talk about their employer’s pension arrangements as part of everyday conversation. Just like asking where someone lives or what car they’ve got. If we all spread the word and help people realise the benefits of joining their employer’s pension arrangements we can empower generation after generation to take responsibility for their financial well being and retirement planning. After all, most of us are expected to be in retirement for 20 years or more and nobody wants to run out of money when they’re too old to work….
*Life expectancy information provided by the Office for National Statistics.
Photo credit: screenshot from our website — www.pensionspenguin.com. Coffee photo: Pexels.
