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The Road to Hell is Paved with Good Intentions

Posted On - 09/12/2016 06:54:29


Pensions Fun? You Bet!

"A presentation from the ‘Division Director of Pensions'? Are you mad? Droning on, flogging me stuff I don't need now. That's going to be as dull as ditch-water."

It's easy to see why you'd think this. But if you are, you've got it wrong.

Funny and bluntly honest, few attending will forget what Ian Price of St. James's Place Wealth Management had to say at our 2016 Open Day – watch the video to see him in action. Alternatively, read our take on his 5 key points for business owners like you… And if you've come here because of some reference to Einstein, read on...

#1: Everyone has to save for retirement

In the UK relative poverty is defined as when someone's "resources are so seriously below those commanded by the average individual or family that they are, in effect, excluded from ordinary living patterns, customs and activities". To say that's not a great place to be is putting it mildly.

Relative poverty uses a statistical measure that accounts of things like benefits, tax and housing called "equivalised disposable household income". You'd be in relative poverty if yours was 60% of the median. What's that number? For 2014/15 it was £284 a week. And the 2016 state pension? £155, double that for couples.

How you choose to live is of course your choice. And if the state pension does for you we wish you the best, well done. But while it may be a 1st-world problem to lament over ‘free money' in old age, the prospect of a meagre income won't be filling many of you with joy. Whatever you think about the role of the state and how it should provide for us there's an inconvenient truth. We are where we are - saving for retirement isn't an option, it's a necessity.

#2: If you don't accumulate enough, you risk outliving your savings

Sixty-five years ago men in the UK retired at 65 and were lucky to make 70. Today at 65 many will nudge their early 80's. And if they were born in 65 years' time the ONS predicts it'll be the norm they'll make over 100. We're all living longer.

But while the retirement age in the UK is going up – set to hit 67 by 2028 - it isn't climbing anything like life expectancy. So everyone's spending more and more time in retirement. Where once you were a pensioner for five years, today you'll be one for 15.

This is brilliant of course it is. The ‘reward' for a life of toil is a new life spent doing what you want – including work. But it comes with a catch. A longer retirement needs more savings to fund it. It's already three times what it used to be.

Your retirement fund won't last indefinitely. As you age it will dwindle. If you keep subtracting one number from another, eventually it disappears. It's called arithmetic. It's inescapable. It's inevitable. And while outliving your savings has always been possible it's now becoming more and more likely. That is unless you save enough. The question is, how much is that?

#3: Determine how much you need to save

In "How to Create a Business Worth Buying" Ian Price talked about how retirement income is usually funded from four sources: pensions, investments, house and part-time work. As business owners you of course have a 5th – your business. But on this Ian is clear "until you sell you've no idea what it's worth." He's right. Sure, you may have an idea of it's price, but until the deal's done that's all it is.

While calculating how much you need to save may be your goal, the real question is working out what you'll actually need. Last week's '20 times' rule-of-thumb tells us every £1,000 you don't avoids £20,000 savings. So taking time and thinking this through carefully is worth the effort. Life will change and you'll spend less not just because you're a pensioner. The daily commute, gone. Work clothes, gone. Cheap public transport. Reduced prices for the cinema. Reduced council tax. Free TV license. Many discounts and deals aimed directly at the over 65's. It all adds up.

A different angle. In 2014 the Joseph Rowntree Foundation worked out the after-tax income retires would need for a minimum acceptable standard of living. The figure was £9,500 (£13,700 for a couple). It assumed no mortgage, car, internet access, dishwasher, cigarettes, paid-for sports or film channels and spending less than £20 a month at a restaurant. But it included buying birthday presents, a week's UK holiday, six day trips a year, alcohol and visits the cinema. So hardly a prison sentence, possibly even OK. Whatever, it points out something pretty important. That you may need less than you think. Perhaps that savings mountain you're facing is smaller than it looks?

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