Could you stump up £43,100 a year for the rest of your life without earning another penny? No, neither could I.
Yet, the pensions industry estimates that this is how much someone typically needs to achieve a comfortable lifestyle in retirement (couples need £59,000). And those figures are after tax, by the way. Before tax, you’d need £50,887 coming in – or £67,464 for couples.
If you think that’s a stretch, you’re not alone. Fewer than one in ten households are on track to achieve a comfortable retirement of weekends away, treating loved ones to occasional slap-up meals and replacing a tired bathroom and kitchen every ten to 15 years.
But more worryingly, a new study last week revealed that around five million people – a third of workers who are saving into a defined contribution pensions – are not even on track for a minimum standard of retirement.
For those on low earnings, this figure rises to two thirds, according to the report from the Institute for Fiscal Studies (IFS).
Just to give you a sense, a minimum standard of living costs around £14,400 a year (£22,400 for couples) according to industry figures from the Pensions and Lifetime Savings Association. That would get you about £95 a week to spend on groceries, £100 a year for rail fares but no car, and a week-long UK holiday every year.
The pensions industry estimates that £43,100 a year is how much someone typically needs to achieve a comfortable lifestyle in retirement
Rather than despairing, the IFS is on a mission to improve the picture and has come up with a list of ways to help get everyone up to a minimum standard of retirement.
Before you dismiss them as coming from just another report from yet another think tank, here is why the IFS ideas are worth paying attention to. They have attracted one very avid and influential listener: the pensions minister. At an event in Westminster to launch the report last week, Emma Reynolds MP couldn’t have been keener to emphasise the incredibly high level of esteem with which she held the IFS and its work on pensions. ‘We very much value the IFS expertise, the strength of your research and the contribution you make to the public debate about pensions policy,’ she gushed.
‘And I look forward to working with the IFS on your own pension review and our own pension review.’ And if you need further evidence that the IFS ideas could become government policy, it is this: Emma Reynolds didn’t leave.
When ministers attend industry events, they typically make a short speech, soak up the applause and then disappear off in a flurry of urgency and importance.
An event in Westminster last week to launch an Institute for Fiscal Studies (IFS) report saw Emma Reynolds MP speak briefly… before sitting down to watch the remaining presentations
Instead, Reynolds spoke, offered to answer questions (although she shirked the one asking what she thought about pension tax relief), and then sat in the front row listening intently to presentations for the next hour.
So what is the IFS proposing?
The most radical suggestion was workers should receive payments into their pension from their employer even if they choose to opt out of paying in themselves.
At the moment, under auto enrolment rules, employers must pay in the equivalent of a minimum of 3 per cent of a worker’s salary into their pension and the employee must pay a minimum of 5 per cent. But, if the worker opts out of paying in, the employer pays nothing.
Our own Jeff Prestridge was awarded Best National Journalist
2024 by the Association of Investment Companies at their annual Media Awards last week.
The association supports and promotes the long-term benefits of investment trusts and companies and singled out Jeff, our Group Wealth & Personal Finance Editor, for his unrivalled coverage of investment companies, especially in his weekly Fund Focus feature in The Mail on Sunday.
Jeff Prestridge with his award last week
This one tweak to the rules could boost workers’ pensions by £4 billion a year, says Mubin Haq, chief executive of the Abrdn Financial Fairness Trust, which partnered with the IFS on the report.
The danger is that workers would be more likely to opt out themselves (rarely a good idea) if they were still getting contributions from their employer.
It also suggested that auto-enrolment should be open to everyone from age 16 to 74 – a massive widening from the current range of age 22 to state pension age.
And if the IFS gets its way, workers earning £35,000 or more would automatically pay more into their pensions. For example, they could pay 12 per cent on earnings above £35,000 – with the extra cost being borne by them and not their employer.
At the moment, auto-enrolment only kicks in on earnings above £6,240, but the IFS proposes to bring this down to zero. That would clearly be good for people’s pensions, but difficult for those on low incomes.
But to make things easier, the IFS suggests putting these additional contributions into a savings account that could be accessed if needed – or saved for retirement if not.
The IFS also proposed rolling out a form of auto-enrolment to the self-employed. As few as 20 per cent of self-employed workers with profits above £18,000 a year are saving into a pension. If you think the retirement outlook is worrying for employees, it’s nothing on what millions of self-employed workers may face.
The most radical IFS suggestion was for workers to receive payments into their pension from their employer – even if they choose to opt out of paying in themselves
So, are they good ideas?
Well, they add complexity to the auto-enrolment system which has been successful precisely because of its simplicity. The current system is easy to understand, requires no engagement from workers and just ticks along in the background. We’ll have to see if tweaks and changes upset the balance.
But, the IFS thinks they could boost retirements of those on track for low and middle incomes in retirement by £1,400 to £2,100 a year – and would reduce take home pay of lower earners by less than 1 per cent. Not bad. It might not get us to a comfortable retirement, but could make a difference.
Your tip to save £5,000 on a facelift…
How do you decide when to save and when to splurge?
I received some true pearls of wisdom from readers when I posed this question last month. Molly G responded to my comment that I had dithered over whether to treat myself to a jacket.
She emailed: ‘My answer to you is, please stop worrying and allow yourself to let go. £60 on a jacket is sod-all!’ DollyGirl1 gave this advice: ‘My old school godmother taught me 60 years ago that when I have some money, I should ‘Spend a little, save a little and give a little away’, which I still think is a great philosophy. I still work to that after all these years.’
But the last word must go to Gina from Hampshire. ‘In 1988 I found myself coveting a £100 bottle of face treatment, which was marketed as a stop-the-years dream come true,’ she writes. ‘It was gloopy, pale pink iridescent liquid and I just ‘had’ to have it.
‘My husband incredulously asked: ‘Did you just spend £100 on a face lotion?!’
‘I answered: ‘No. I have just saved £5,000 on a facelift!’
Do you agree with their advice and strategies? Let me know.
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