We’re still not saving enough for our retirement. A new survey by Scottish Widows suggests that not only is one in five of us not saving at all, but the rest of us aren’t saving anything like enough to enjoy the retirement we think we deserve. So just how much should we be putting away?
Let’s say that you are hoping to retire at 65 on an annual income of just over £24,000. The state pension should take care of the first £7,000 of that when it eventually kicks in (check at what age you’re likely to qualify for it, as it is on the rise) but that means you still need to come up with £17,000 a year yourself.
Hargreaves Lansdown has done the numbers on this. They say that to buy an annuity paying out £17,000, you need a pension pot of £425,000. To get that, a 25-year-old needs to start saving £420 a month; a 35-year-old £690; and a 45-year-old £1,250. That sounds like a lot, and it is. But it also assumes that inflation is 2.5% (which is isn’t) and that your savings will grow at 6% a year (which looks unlikely). So the chances are that you will need to save even more than that.
If retirement is imminent and you don’t have £425,000 in the bank, make sure you make good use of what you do have. Most people use their pension pot to buy an annuity when they retire. But they also make the mistake of buying the one offered to them by their pension provider instead of shopping around. All pension holders have an ‘open market option’ (OMO) – the right to buy their annuity from whoever they like – and they should use it: studies show that the difference between the best and worst deals can be up to 20%. You can compare rates by using websites such as Annuity Direct, The Annuity Bureau, or Hargreaves Lansdown.
While you are using your OMO to get quotes, make sure you disclose everything you can. It might well be that once you’ve listed your vices and medical maladies you qualify for an impaired annuity. These pay a higher annual income to people who qualify – typically due to health issues or bad habits that mean they aren’t expected to live as long as they might otherwise do.
That might make them sound like they are the reserve of the decrepit, but a recent trial by Just Retirement showed that seven in ten people could qualify for one. For example, if you have a pension fund of £50,000 and are a 65-year-old man, a standard annuity might buy you a £3,100 a year income, says Rosie Murray-West in The Daily Telegraph. But if you come clean about drinking 36 units of alcohol a week, you could get an extra £350.