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Under-45s underestimate pension needs

Nearly half of under 45s believe that a £100,000 savings pot would be enough to last retirement, even though this would provide an income of just £5,400 a year, new research suggests.

A Sanlam report estimates that a pot of £480,000 would actually be needed for a comfortable retirement.

A third do not think they will be able to meet their pension pot goal, and a similar number are put off saving because they expect to receive an inheritance.

A third of under-45s currently have less than £10,000 in their pension pot, and 24 per cent do not know its value.

However, older savers also appear underprepared for retirement. A fifth reported that they don’t have any savings in their pensions, and 22 per cent are unsure of how much is in their workplace pension.

Sanlam UK senior wealth planner Carl Drummond says: “Our research confirms what we have long-feared; that people of all ages are simply not engaged enough with their pension and their financial security in retirement. Despite the best efforts government and many employers, the message is still not getting through that people need to think carefully about how much money they will need in retirement and start saving accordingly.

“Our research highlights that many under-45s see inheritance as a panacea, but that’s a big gamble. Money being passed down from parents or grandparents is often split-up among other family members or, increasingly, used to pay for care costs meaning the under-45s might not inherit what they expect.”

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  1. “A Sanlam report estimates that a pot of £480,000 would actually be needed for a comfortable retirement.” Comfortable relative to what? Relative to pre-retirement income of, say, £100K p.a. and using Sanlam’s notional annuity rate of 5.4% p.a. an income of £25,920 p.a. + State Pension/s may well not be considered comfortable.

    My approach (FWIW) is to use a notional annuity rate of 5% p.a. which indicates that a pot of £500,000 will be required to produce, in broad terms, an income of £25,000 p.a. (and that’s without escalation).

    For those who feel that £20,000 p.a. (+ State Pension/s) will be adequate, this target pot can be trimmed to £400,000. For those who feel they’re likely to need not less than £30,000 p.a. the target pot needs to be upped £600,000.

    And, for those intent on Income DrawDown in preference to spending ¾ of their pot on an annuity, the notional rate needs to be trimmed to 4% p.a. which, of course, mandates the need for a larger target pot such as 625,000 for £25,000 p.a.

    But I agree with the general thrust of the report’s findings, namely that a notional pot of just £100,000 is likely to be hopelessly inadequate.

    Many clients may well consider the idea of accumulating a fund of £500,000 (less than half the LTA) to be beyond their means. Our job, as advisers (dare I use the term financial planners?) is to show/persuade them that (for all but those who’ve left things hopelessly late) a target fund of this size IS, in fact, achievable with a realistic level of input, determination to maintain contributions through periods of poor returns as well as good (stopping them when markets take a tumble is one of the worst things they can do) and choosing a selection of funds most likely to provide the necessary levels of growth (which requires a careful discussion around and regular reviews of their ATR).

    On the latter point, the FCA’s imposition of different rates of assumed future growth for different types of fund and adjustment for inflation is well intentioned but, as we all know, has made this whole process ten times more difficult than it really ought to be ~ difficult to explain and difficult to understand. Might it not be vastly better to employ uniform rates for all types of fund and leave it to the adviser to explain to the client that an overly cautious investment strategy is likely to result in that rate of growth not being achieved?

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