Pensions crisis? What pensions crisis? That might well be your response after reading that couples who have retired in the past decade have far more money than they need for retirement.
Complusion is very useful
Younger generations being autoenrolled into company pensions might think being pushed into saving for retirement is a modern trend, but the government only introduced it because companies, faced with escalating costs as people live longer, withdrew from providing pensions.
People born in the 1940s were pushed into saving. They were also likely to belong to a generous final salary pension scheme. They also benefited from being forced to save into the state pension top-up, the state earnings related pension scheme (Serps), which later became the State Second Pension (S2P). This means some people are retiring with a state pension of £220 a week (£11,440 a year). The introduction of a “flat-rate” state pension from April 2016 will end the top-up system. “They didn’t have to think about saving as they had it done on their behalf,” says Stephen Womack, of David Williams IFA.
Property is not the whole answer
Today’s pensioners benefited from massive house price growth. In 1965 the average home cost £3,355, according to Nationwide. Today the equivalent is £189,306. Although there have been long periods when prices have stagnated or fallen, prices have increased by about 234 per cent in real terms since the mid-sixties.
The 1940s generation also benefited from periods of very high inflation when their mortgages became smaller in real terms. That means many of them have significant equity in their homes.
The IFS study reveals that even when property is taken out of the equation, the surplus they have left to pay for retirement is typically more than £120,000. Throughout the 1960s house prices cost three times average earnings, according to data from the Council of Mortgage Lenders. The latest figures from the Halifax show that the house prices to earnings ratio is now 5.01. With around half the population now attending university, most people in their twenties start their adult life in debt, a further hindrance to getting on the housing ladder.
Against this backdrop, many of those who retired in surplus face the choice of spending the extra money on themselves or passing it down to their children or grandchildren.
Frugality is key
Consumer spending took off in the 1960s after post-war austerity and ever since the demands on our money have got much greater.
Previous research by the IFS has suggested that the failure of those born in the 1960s and 1970s to put aside as much as those born a decade earlier is down to their consumer habits, not their ability to save.
The report found that those born in the Sixties and Seventies had higher incomes during early adulthood than their predecessors but spent the extra money. That habit now seems ingrained and things that would have been luxuries to previous generations are now viewed as essentials.
Mr Womack says: “In the 1960s and 1970s you didn’t see stag nights to Ibiza or nail and waxing salons on every corner. Nowadays households can end up spending £250 a month on phones, pay TV and broadband and then put aside just £20 on pensions.”
Joss Harwood, of Eldon Financial Planning, adds: “Saving needs to once more become an accepted culture, at the expense of ‘living for today’.”
Acknowledge the difficulties
“The current generation of pensioners have enjoyed a golden period of high equity and property returns, generous occupational pensions, followed by a rapid increase in life expectancy and an improved state pension,” says Tom McPhail, of financial adviser Hargreaves Lansdown.
“One real risk is that the next generation will have their retirement expectations set by what they see the current generation of pensioners enjoying. Unless they take an active interest in how much they are saving, they are likely to be very disappointed.”
Save enough money
How much you should be saving depends on your individual circumstances: what you can afford and what expectations you have for your retirement.
Hargreaves Lansdown has a quick rule-of-thumb guide. This shows what you need to be putting away each month if you start saving during your 20s, 30s, 40s and 50s in order to achieve a retirement income at 65 of £20,000.
It assumes investment growth of 5.5 per cent and inflation of 2.5 per cent and the pension contributions are quoted gross, after adding back tax relief to the after-tax contribution.
- Age 20: £500 per month, or 24 per cent of gross income for someone earning £25,000.
- Age 30: £730 per month (25 per cent of income for someone earning £35,000.)
- Age 40: £1,180 per month. If you have left it this long to start a pension the financial burden becomes much greater. Even assuming your salary has also risen to, say £40,000, the contribution of £14,160 a year represents 35 per cent of gross income.
- Age 50: £2,230 per month (an annual amount of £27,760, or 55.5 per cent of a gross income of £50,000).