The UK is a great place to live for many people, and in many respects. However, one area where it is widely seen to perform poorly is the state pension available to retired people.
A study by the OECD (Organisation for Economic Cooperation and Development) released a report towards the end of 2017 on this very subject. According to its findings, the UK offers the worst state pension out of the world’s 35 most developed economies.
On average, a typical worker in developed economies will get nearly two-thirds of their salary from the government when they retire. A low earner will get about half of their salary.
The average UK worker, however, will get 29%.
To put this in perspective, a French 20-year old worker can realistically hope to retire in their early 60s. A UK worker at the same age, however, is likely looking at working into their 70s.
The new state pension currently stands at £164.35 per week, adding up to about £657.4 per month (164.35 x 4). This is hardly enough to live on, let alone allow you to thrive in retirement as most of us hope to do.
Clearly, urgent action by the UK government is required – as well as careful, individual financial planning – to avoid poverty in old age.
With people living longer, and final salary pension schemes in decline, this will only become more important as time goes on.
Does it Really Matter?
“Sure, £164.35 per week sounds quite low. But my outgoings will be a lot lower in retirement too.”
This can be a tempting line of thinking. After all, many of us hope to have paid off our mortgage by the time we retire. The kids also should have left home by then too (fingers crossed!).
However, for most of us, old age ends up being a lot more expensive than we anticipate.
Consider, for instance, that more than 25% of over 50s in the UK currently spend, on average, nearly £4000 per year on their children’s living expenses.
Rising rents and living costs are causing more and more young people to stay at home past their 18th birthday. So it seems reasonable to not expect a reversal in this trend anytime soon.
Of course, our clients do not expect to live purely on the new state pension. By working with them to craft a solid financial strategy and long-term plan, a much more positive financial future is painted.
However, it is quite likely that our clients and other successful, retired people know younger people who would benefit from sensible, forward-looking financial planning earlier on in their working lives.
How Younger People Can Start Taking Action Now
There is some positive news in and amidst the gloom.
When “voluntary” retirement income streams are taken into account as well as the state pension (e.g. workplace pensions), then UK workers can hope to achieve a much higher annual income when they reach retirement.
An argument can certainly be made in favour of “auto-enrolment” here. As of April 2019, this will force all UK employers to contribute 3% of a worker’s salary towards a pension. The employee will also be required to contribute 5%, making up a total of 8%.
This is unlikely on its own, however, to give young people the kind of lifestyle currently enjoyed by many of their parents. Everyone has different financial goals and lifestyle choices, of course. Yet current estimates for a comfortable retirement estimate a required income of between £23,000 and £27,000 per year.
Indeed, you could need as much as £40,000 per year if you are after a more luxurious retirement. This includes, for instance, regular new car purchases and long-haul holidays abroad.
So what does this mean, practically, for young people who want a comfortable retirement, and who are considering relying solely on auto-enrolment and the state pension?
In short, they are going to need to take further action. Assume, for instance and for simplicity’s sake, that you are on a £30,000 income every year for 40 years before you retire.
If you are putting 5% aside every year and your employer is contributing 3%, then that would add up to a pension pot of £96,000. If you retire at 70, however, then how long can you reasonably expect to sustain an annual income of £27,000 for a “comfortable retirement” lifestyle? Even when you factor in the full, new state pension?
By planning your finances ahead with a financial adviser, however, you can devise a robust strategy to sustain you through retirement. Indeed, it is quite likely that you can go much further beyond that.
It could be, for instance, that it is possible for you to enjoy a more luxurious lifestyle than you imagined, or retire earlier than you originally thought.