As a nation, we're not saving enough money to live on when we retire - so what should you be squirreling away?
More than half of the working population are failing to save enough money to provide a decent enough income when they give up work.
Startling new statistics from Scottish Widows highlights the gap between people’s expectations in retirement and what they’re actually saving - and many workers look set to be disappointed in later life.
Unrealistic savings and expectations
Pension savings have hit a record low, according to Scottish Widow’s eighth annual Pensions Report, with one in five people putting nothing aside for retirement. Two fifths of over-30s would also like to retire by the time they reach 60, even though the State Pension age is rising to 66 by 2020 for both men and women.
Despite a lack of provision for later life, the annual income respondents said they would be comfortable living on by the age of 70 has increased by £200 since the last report to £24,500.
What you need to put aside
For people looking to draw a pension now, the average savings pot is £150,000, which buys an annuity (a guaranteed annual income) worth around £5,700.
With the State Pension on top, this equates to around £13,000 a year – a little over half the nation’s expectations for when they reach a pensionable age. If you wanted a yearly income of more than £24,000 a year, you would need to save an extra £375 a month to make up the difference.
[SPOTLIGHT]Clearly that's a sum beyond many of us, but it is possible to identify areas where you can save a few extra pounds a month. One way to do this is to make use of the lovemoney.com MoneyTrack budgeting tool.
Start saving early
The earlier you start saving, the better the chances of your money growing in value.
This is thanks to compound interest. The interest paid in the second year of saving is based on your original sum invested, plus the interest earned the year before. This builds and builds steadily over the years and means it’s typically more effective to save a little and early than trying to save more when you’re older.
For example, if you save £50 a month for 30 years you could end up with a retirement pot worth more than £48,000. However, even if you save double – at £100 a month – for half the number of years, you’re likely to be left with savings worth less than £29,000.
You also benefit from tax relief on contributions into a pension scheme, boosting the value of your savings even further.
Read Six steps that will treble your pension for more tips on ways to boost the size of your pension pot.
Auto-enrolment
A final boost to your pension comes in the shape of auto-enrolment. This is being phased in from October this year and will see employees automatically enrolled into a pension scheme. For more information read Auto-enrolment: pensions are getting better, but nobody knows it.
If you are aged at least 22, are not already saving into a workplace pension and earn more than £7,475 a year, you will be affected by auto-enrolment.
Initially you pay a minimum of 1% of your salary into the savings scheme, while your employer will match this with a minimum 1%. This will rise to 5% and 3% respectively by October 2018.
You can opt-out of the scheme, but if you do this, you need to think of another way to save for retirement and other methods might not be as effective.
What are you doing to save for retirement? Do you think you are saving enough? Let us know in the comment box below.
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