Workplace Pensions may be mandatory but they’re not enough to retire on
There’s been a fair amount of media coverage recently regarding Pensions with most small companies facing the deadline to set up a Workplace Pension Scheme in the next few months (if their staged deadline hasn’t already passed).
Additionally the Independent Review of Retirement Income (IRRI) has just been published which has also generated a fair amount of coverage.
I can’t help thinking that being enrolled in a pension is giving employees a false sense of security however. It’s great for an 18 year old just starting their working life to start contributions, but in reality none of the Workplace Pension schemes will adequately provide for a decent retirement as the contributions simply aren’t large enough.
Even the IRRI suggests the target for savings should be 15% of salary, but this take no account of age. 15% for an 18 year old over their entire working life (depending on their eventual retirement age) may well be adequate. However if you’re already in your 50s the eventual 3% minimum employer contribution, and 5% employee contribution simply won’t build up a big enough savings pot by retirement. Plus any of your earnings beneath £5824 or over £42,385 will be ignored in calculating employer and employee contributions.
There have also been some random figures bandied about that the average UK employee retires with a £28,000 pension pot but that workers should aim to have a pot of some £230,000 on retirement. That’s a misleading number as the size of your required pension savings really depends how much you earn or rather what level of retirement income you hope for. £230,000 is probably a minimum and no where near enough for most people.
Realistically a worker who saves 15% of their income for their entire working life might expect a pension of around 50% of their salary as a pension. If you’re 40 with no pension arrangements then you should look to start contributing a massive 40% or more of your earnings if you want to retire in comfort – not many people can afford that.
The government knows that there’s a problem and are insisting that you set up a Workplace pension for your employees. That’s a legal requirement however inadequate a pension it may actually provide for them in their retirement. Tamebay friend Will Wynne founded Smart Pension to help solve auto enrolment for the UK’s small businesses (at no cost to the business concerned) so if you’ve not set up your Workplace Pension scheme they’re worth considering.
Don’t just set up a Workplace Pension for your employees and ignore your own retirement however (even if you’re in your own Workplace Pension scheme). If you’ve not considered retirement sooner rather than later is always going to be easier on the wallet and, unless you know you’ll be able to sell your business to fund retirement, have a serious think about how you’ll fund your lifestyle in your old age.
Many years ago I had a friend whose connections included several people who regularly formed part of various policy making groups and think tanks for national governments.
They told me that our governments were only too well aware of the impending problem of those who will reach retirement age totally unable to fund any kind of personal pension due to low incomes, especially the self-employed.
In many rural or deprived areas, the only way to stay sane was to work for yourself, and of course there is no national minimum wage for the self employed. This means that today for example there are working people who qualify for maximum tax credits and benefits, but still earn too little to pay into a pension.
For those of you who have no knowledge of that sort of existence, imagine a family business where sales have slowly fallen to a point where average monthly profit can be less than 300 pounds. Now use an online benefits checker and you’ll see that even though they qualify for maximum working tax credits, child and housing benefits etc, total income is still so low that even if they could double their turnover each year, they wouldn’t lose a penny in benefits.
I know a few people in that situation, and as they’re all self employed , they will fund their ‘retirement years’ by continuing to do some form of online selling until the day they die.
All of those people are British born and bred, struggling even though they’ve always worked, so imagine their feelings when into their deprived areas the government place various groups of refugees who’ve obviously never paid into our system and can now claim or be given totally renovated properties, smart phones etc, whilst the Brits cannot afford much in the way of secondhand furniture unless they go into even more debt.
Personally I’m just about ok thankfully, but those in the situation I’ve described are left wondering when any government is going to publicly admit and face this problem – surely they cannot allow working Brits to get to ninety years of age still having to claim whatever replaces tax credits in those times ?
Failure to prepare, prepare to fail.