SMUG MONEY: Are you accidentally spending your pension?

Written by Rebecca O'Connor on 19th April 2017

I don’t know about you, but I could easily turn £131 into three pairs of super skinny jeans and two pairs of pumps in a tired hour on the M&S website after an episode of Broadchurch.

What I am actually doing, without realising, is chucking away my future pension income.

Which?, the consumer group, has crunched the numbers and found that for a 21-year old to ensure a decent income of £26,000 in retirement, they need to put away £131 a month, every month, from right now until they retire.

Leave it til age 50, and that monthly amount rises to £633.

  • £131 a month from age 20

  • £198 a month from 30

  • £338 a month from 40

  • £633 a month from 50

… That, my friends, is the cold, hard truth.

The ideal pension income of £26,000 a year, says Which?, is what retired couples today consider sufficient to meet comfortably all of their bill payments and regular spends, plus one European holiday a year and some leisure activities. It’s not even a row of Bentleys and a Virginia Water mansion, and yet still, you will definitely notice the difference that saving it makes to the next 30 or so years.

So little old me, at 35, should be putting in roughly £270 each month, simply to sustain myself financially into the age of reading books and visiting garden centres?

Have I got £270 a month to put aside? Well, I am putting aside about £400 a month now as it happens, but only £200 a month of that is reserved for my pension. I could maybe eke out another £70 a month if the whole family goes vegetarian and we give up one of our two (UK-based) holidays.

Which brings us to what is particularly interesting about these figures: putting them in the context of the rising consumer debt mountain, which the Financial Conduct Authority raised concerns about yesterday.

Regular folk are chasing their tails when it comes to saving.

If you have unsecured debts on credit cards or loans, it is almost impossible to think about putting anything aside for your future until these are (at least mostly) paid off. But there is also the increasingly thorny problem of inflation – no doubt not far from the top of Theresa May’s list of reasons to call a General Election sooner rather than later.

Put simply: consumers are in more debt and are paying more on their spending, whether that’s housing, energy or food, making it even harder to pay off the debts and putting long-term savings even further down towards the back of the queue of financial priorities.

Jam tomorrow? Not if it means no bread today. Who can argue with that?

There are good reasons people aren’t saving more for retirement – and it’s not just because of undisciplined late night spends on the M&S website. It’s because they are paying their mortgage or their rent, paying for food, paying for heat and light and maybe, God forgive them, a Netflix subscription and a takeaway pizza twice a month, managing to meet their credit card repayments and feeling just about ok mentally after all that financial juggling and not having the time, the energy or the spare cash to put anything aside for the future, no matter how many times they are reminded about the need to save for retirement, because they just literally, simply, can’t.

The problem is, though, that if we carry on like this, there will never be jam. Even those that do manage to put something aside are seeing its value decimated by higher than desirable price growth.

Will Which’s assumptions on our required pension income even be realistic in 30 years’ time? It’s hard to know if what would have worked as a savings habit two decades ago will do so again now, in a very different, always precarious-seeming economy, with low interest rates and high inflation always biting at the heels of savers.

If all that makes you feel a bit “live for today” rather than “take me to the nearest SIPP (that’s Self Invested Personal Pension) provider”, then we’ve got some inspiration for you, from Kate Smith, head of pensions at Aegon:

“An annual income of £26,000 is achievable provided people start saving early. Savings from both partners also have the added bonus of an employer contribution via their workplace pension twice over. Realistically few people will be in a long-term relationship from the age of 20, so it’s important that they take personal responsibility and realise that the buck stops with them when it comes to pension savings. The key to building a good retirement pot lies in what you do in the early years to make pension saving a habit and not a chore.”

So a bit like going for a run three times a week just because, you know, it’s what you do.

Kate’s top pension saving tips:

  • Don’t delay. Start saving as early as possible. Make a plan, including all your pensions and savings.
  • Don’t opt out of your workplace pension. Save enough to maximise your employer’s pension contribution.
  • Work out how much you’ve saved in pensions and other savings you’ve targeted for retirement, such as ISAs.
  • Get a State pension forecast online https://www.gov.uk/check-state-pension or call the Future Pensions Centre helpline on 0345 3000 168.
  • Work out what retirement income you need. Use online tools and calculators such as:https://retiready.co.uk/retirement-income-planner.html.
  • If you are in your scheme’s default fund, do your research and consider selecting your own funds.
  • Regularly review your plan, your pension and savings accounts. This is especially important for women returning to work from maternity leave and those whose children have reached school age, when nursery and childcare costs are no longer an expense.
  • If you can afford it, seek professional financial advice.