Could you give me some advice over the level of pension saving I should be making and what life cover I should take out?
“Mr Average” client sometimes asks what is the average pension contribution and level of life cover they should put in place. The usual answer we give is that there is no such thing as an average and they should tailor plans to their own circumstances and requirements.
What they are really looking for is reassurance that they are among the majority and will enjoy normal standards of benefits or protection.
Let us try to consider Mr Average and establish some guidelines. These are obviously not fixed in tablets of stone but are subject to all the personal circumstances, wants and aspirations that the individual may have.
According to a recent article I read in London's Metro newspaper, the average worker has 36 per cent of their earnings taken away by either direct or indirect taxation. This leaves Mr Average with 64 per cent of his income for his own needs. This 64 per cent of earnings is in effect 100 per cent of what he has control over.
What are the needs of Mr Average for that 100 per cent? We all need shelter, warmth, food and clothing. After that come fun and future plans.
According to the National Statistics Department, the following figures show how Mr Average spent that 100 per cent between 1996 and 1999.
If he was a member of a traditional final-salary company pension scheme or a public sector scheme, he would be paying around 6 per cent of his earnings into the scheme. So, our client, who does not have a pension, could use this as a benchmark. If he paid this amount net, it would effectively be 7.7 per cent of earnings on a grossed-up basis.
Looking at protection needs, these will vary with individuals but, say, 3 per cent of earnings may be spent in this area, split as dictated by the individual's situation.
What should our client set aside for today by way of an emergency fund? Prudently, 5 per cent of earnings would build up into a reasonable sum over time, given personal circumstances and the ability to live within one's income.
Given that it is thought that around 50 per cent of the population have £500 or less in liquid assets, this strategy would prove eminently sensible.
The above amounts for pension, protection and savings total 15 per cent of Mr Average's after-tax income. Where will this come from, given the statistics on average spending patterns?
Given that the population is becoming more overweight and, in many instances, actually obese, if he cut his food spend from 17 to 14 per cent, it would not only be good for his health but free up 3 per cent towards his plan.
The same argument would apply to alcohol and tobacco. Alcohol has some medicinal benefits but tobacco none that I know of, so let us cut the spend in half from 6 to 3 per cent, which gives another 3 per cent. We now have 6 per cent towards our goal – nearly half way.
Still on the health and benefits theme, if he used the car a little less and walked to get the paper, or indeed to the pub, he could reduce this spend by 3 per cent to 14 per cent. We now have 9 per cent, leaving only 6 per cent to find.
Assuming that he will want to enjoy himself in future years as well as now, he will surely see the benefit of putting aside some of his leisure spend, say, 3 per cent, still leaving a reasonable 14 per cent for today's fun and frolics.
Now we have 12 per cent towards our goal. Easy, isn't it?
Where do we find that extra 3 per cent? Looking at his spend on household goods and services, maintaining and recycling could reduce his spend by 2 per cent to 12 per cent. Now he only needs another 1 per cent. He should be able to review his miscellaneous spend and, with some careful budgeting, reduce this from 4 to 3 per cent and he then has his 15 per cent.
It is well known that happy people have a greater life expectancy than miserable ones – just look at Victor Meldrew if proof were needed. There you have Mr Average and his above-average plan.