If you want to retire, start saving now

I am bemused by the coverage of George Osborne’s announcement that henceforth the state pension age will rise with life expectancy, which suggests that today’s young will not get their pension until they are knocking around 70. Anyone born this year might end up waiting until they are 77, and those born in 2050 until they are 84 (PWC numbers).

The papers were instantly filled with pictures or perfectly prosperous-looking young people sadly noting that “we may never enjoy retirement”. Alongside those came laments from columnists across the political spectrum pointing out that, while we might be living longer, we aren’t necessarily living healthier. What if we can’t actually cope with working that long, they asked?

But this all seems to miss a perfectly obvious point: anyone who equates retirement with the age at which they get a state pension is living in another world – one without record levels of debt and a consequent guarantee of broken financial promises at every turn regardless of who is in government .

No one who has even the vaguest understanding of how the UK’s public finances work and will work (there isn’t enough money…) is even thinking of relying on their state pension. They know that’s just not an option. They’re saving now so they can retire when they feel like it. That means auto enrolling in company pensions as soon as possible and adding to the minimum as much as possible from as early an age as possible.

Then, when you have a reasonable amount in your pension pot, saving as much into ISAs as possible (I’m nervous of a new pension tax). How much and how soon? Save £200 a month from the age of 20, see it return an average of 5% a year and you will have a lump sum of around £405,000 when you retire at 65. Start at 40 and save double that and you will only have £238,000.

Start early, even if you have to start small.

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10 Responses

  1. 10/12/2013, Marko wrote

    I’m worried about a pensions tax too…

    And then an ISA tax, followed by a VCT tax, followed by a 100% capital gains tax.

    As they run out of money there will less methods of keeping it out of the governments greedy hands.

    • 10/12/2013, Romford_Dave wrote

      The Viv Nicholson approach to saving will mitigate any liability for anyone fearing a tax grab…

  2. 10/12/2013, dave21kj wrote

    As we moved from the stone age to collective farms to the industrial age to the digital age, all these human advances were supposed to improve our life’s. Anyone remember Tomorrow’s World? Used to be on before Top of the Pops and the main issue was going to be what to do with all the spare time. Retire young, shorter working week. Advances in productivity would be shared by all.
    Reality? Someone pocketed the productivity and the outcome is now the opposite. Both sets of parents working long hours, pension at 80. Taxed all ways. Our kids now pay for higher education, no mortgage tax relief, no final salary pension…
    and they have to fund our busted state.
    Now planet Merryn wants us all to save earlier. But we all know the state will grab the money in any case.
    My advice to the young. Get out while you can..

    • 18/01/2014, New Home Expert wrote

      Mortgage Tax Relief was when interest rates were 7% and higher!
      Now we have the Help to Buy state subsidy on new homes and mortgage guarantees.

      But yes you are right, saving for a Pension is the most stupid thing you can do unless you get employer contributions and 40% tax relief. Even then, the ISA allowance should be used first.

  3. 11/12/2013, Merryn wrote

    @dave21kj. I think it is a good idea to save early, yes. But mainly the point is that the state is going to have to shrink – the taxpayer can’t afford for it to be all things to all men always. So we need to take responsibility for our own retirements.

  4. 11/12/2013, dave21kj wrote

    My point is that it is harder and harder for young people to save as they have many more challenges than the generation that created the mess.
    To add insult to injury they have to fund the people that had the big party in the first place!
    Now the average voter age ratchets upwards and our democratic process needs to satisfy the “masses” it is hard to see what will be the mechanism that reduces the state.
    But yes, the state needs to shrink dramatically. Not seeing this happening anytime soon. If a Tory government cannot do it in a crisis what chance has UK Plc got..

  5. 12/12/2013, David 1963 wrote

    The single biggest problem we have is that politicians look after themselves not the electorate that voted them in. Their decisions are taken in self interest, not the long term beneficial interest of the country.

  6. 14/12/2013, Sevo wrote

    “Save £200 a month from the age of 20, see it return an average of 5% a year and you will have a lump sum of around £405,000 when you retire at 65″

    An average of 5%?! In a cash ISA? Well anyone starting now will wait a long time to see that as an average return figure…

  7. 15/12/2013, Tyler Durden wrote

    Sigh…….. There will not be a ‘pound’ as we know it now when most people retire at 65.

  8. 18/01/2014, New Home Expert wrote

    Trust the UK government with your personal pension fund? No thought not.
    Trust pension providers not to filtch you for fees over the next 30 years? No thought not.
    Afford to save £400 a month in a pension that you wont see anything back from for 20 years or more? No thought not.
    Happy to give an insurance company your pension pot in return for an annuity giving you 5% a year until you die then they keep the pot? No thought not.

    Pensions good for providers – bad for people.

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