Pensions time-bomb ticking as savings hit new low
According to research conducted by Scottish Widows, the number of people saving for their retirement has hit an all-time low with one in five people failing to make any savings into a pension.
The research, based on a survey of 5,200 adults, suggests only 45% of people are saving enough for their retirement. While respondents on average believed they will need an income of £25k in retirement, the actual income they are heading for was found to be an average of £11,400.
This is yet further evidence that we have a pensions time bomb ticking in the UK with large numbers of people heading for financial problems in retirement. The amount of savings required to ensure a decent income stream in retirement has progressively risen over the years due to a combination of much improved life expectancy and currently low yields on pension annuities and other investment assets. While the latter may change in the future, better health and developments in medical science mean longer life expectancy will hopefully be here to stay so it really does make sense to plan well ahead.
Yet despite the compelling arguments in favour of building up a pension pot, even many higher earners, who could benefit from very attractive tax incentives by making pension contributions, fail to do so.
Pension contributions will generally benefit from effective tax relief up to the investor’s marginal rate. If you invest £8,000 in a pension, the Government will automatically add £2,000 (20%) basic rate relief to your investment so that the gross sum invested becomes £10,000. In addition, higher rate (40%) or additional rate (45%) tax payers may benefit from additional relief via their tax return in respect of the balance because pension contributions are deducted from effective earnings. This mean the net cost of a £10,000 investment could be as little as £6,000 for a higher rate taxpayer or £5,500 for an additional rate taxpayer.
We believe that one of the reasons pensions are sometimes overlooked is that many perceive them as dull returning schemes offered by life offices, with opaque charging structures. Yet over the last decade the pensions market has been revolutionised by the emergence of low-cost Self-Invested Personal Pensions (SIPPs). These enable investors to select from a wide range of investment managers within a single account, similar in many ways to what can be achieved through an Individual Savings Account.
If you are not currently contributing to a pension or are unsure as to whether you are saving enough, the longer you delay, the bigger the problem will become.