Question: "My wife and I are in our mid-40s with combined pension pots of around £200,000. As we are saving £300 a month between us now, are we on track for a comfortable retirement income or should we increase contributions significantly?"
Answer: It’s always worth assessing whether your long-term financial plans are on track, especially with so much uncertainty around the upcoming Budget and its aftermath. Making the most of the money you have now and the potential for future contributions, will act as an important catalyst towards securing the future you hope to achieve.
The definition of a comfortable retirement will vary among individuals; your personal circumstances and wishes will characterise yours. For example, some people will choose to travel more in retirement, while some may gain a financial boost from downsizing – there are many permutations. However, as a broad indicator, the 2024 assessment by the Pensions and Lifetime Savings Association (PLSA) suggests an individual would need £43,100 a year to achieve the goal of a comfortable retirement and £59,000 for a couple.
If both parties receive the full state pension, that would bring in just over £22,000 for a couple, yet pension surveys have long supported a consensus that we are not saving enough beyond the state pension to meet our retirement goals. The recent run of high inflation only intensifies the need to set aside more.
Even without factoring in the impact of inflation, some illustrations will still be useful to help inform your thinking. You are fortunate that £200,000 alone can do much of the heavy lifting, thanks to the power of compounding. And with your ongoing contributions of £300 a month – with a projected return of 5% – that could result in a pot of just under £550,000 in 20 years, a time when you might be considering retirement.
However, the illustration above allows for a 1% all-in fee as the cost of investing. Many people pay much more in investment fees and it’s not unusual to be charged all-in fees of 2% and upwards for others to manage your pension and investments for you. The impact of paying 1% more in annual fees, for a total of 2%, would be that the combination of your current £200,000 pot and £300 a month in further contributions might grow to £460,000 in 20 years. A difference of almost £100k less in the final pot if paying 2% in total fees and charges.
Unfortunately, even if we work on the basis of a pot of £550,000, this is still unlikely to sustain both of you for long enough in retirement – it certainly won’t provide a comfortable buffer if you live longer than generally expected. Let’s instead consider increasing your combined monthly contributions to £600 a month. With the government’s addition of an extra 20% (for basic rate taxpayers, more for higher earners) the value of your combined pension pot – again with 5% projected growth and 1% in all-in fees – could reach around £700,000, making you both well placed to enjoy a more comfortable retirement, especially with the supplement of the state pension.
Back to the thorny issue of the impact of higher fees. If you are paying 2% in fees, your pot would instead be unlikely to reach £600,000 – a hefty price to pay for what seems like a small percentage difference. While the calculations above are purely illustrative, they demonstrate the power of compounding over time and underscore why we reference the importance of fees so often at Netwealth: it makes a huge difference to final outcomes and it is one of the few factors within your control when you invest.
As we have discussed in this column before, as an investor, you can’t control inflation, nor how stock and bond markets perform. Yet you can ensure that you don’t overpay in fees and you can use tax-efficient wrappers such as pensions and ISAs to shelter as much of your investments as possible from tax. If you do nothing else when evaluating your overall financial wellbeing, combining these two powerful attributes alone will have a sizeable effect.
It is sensible that you are already considering whether together you might have enough for a comfortable retirement – it gives you a chance to assess whether you are being charged fairly now and to prepare for a landscape that could change somewhat. The upcoming Budget is likely to have a meaningful effect on many of us, and while we can only speculate what the implications might be, the impact has already been foreshadowed by the government as likely to be “painful”.
Painful for who? In reality, the “broad shoulders” they refer to are likely to include those who have acquired a relatively modest level of wealth by working hard and then saving and investing their earnings by building up pensions and acquiring property. How then might this pain be delivered? It could, for example, be through adjustments to capital gains tax, to changes in pension regulations and allowances or inheritance tax may be targeted, so it is prudent for us to be somewhat prepared for potential outcomes, and potentially worth seeking financial advice.
While financial advisers may not have any greater insight into the Chancellor’s intentions, they can advise you on the potential implications for your finances both inside and outside of tax wrappers. They can help your wealth become more resilient in the face of multiple changes to the tax system and regulations in the years ahead and also to changes to the wider market environment and your own evolving needs.
We are finding that many clients have current concerns in particular about potential increases to capital gains tax and changes to inheritance rules. It’s worth exploring where it may make sense to pre-empt the potential upcoming changes and where it is more sensible to hold fire and gain greater clarity before making any changes.
You are also making a timely financial assessment. Evaluating whether your pension contributions are enough gives you plenty of time to make course corrections if need be. It may also be an opportune moment to take a broader look, to examine whether other investments and allowances are being optimised and to ensure you can further safeguard that comfortable retirement when it eventually arrives.
This article was published in the i on 18th September, 2024.
Netwealth offers advice restricted to our services and does not provide independent advice across the market. We do not offer advice in relation to tax compliance, personal recommendations with regards to insurance and protection, or advise upon the transfer of defined benefit pensions. Please note, the value of your investments can go down as well as up.
