Counting the cost of retirement

The current economic climate has been described as a 'crisis' on many occasions but when we compare the potential long term impact with that of the so called 'savings crisis' it fades into almost insignificance!

Yes by the latest estimates the government's handling of the 'credit crunch' to likely to increase income tax by 3p to 4p in the pound for every taxpayer for many years, so how can this be overshadowed by people's lack of retirement provision?

Quite simply with such increases in longevity (the current life expectancy for a 65 year old man is 84½ years and 87¼ years for a 65 year old woman with life expectancy  increasing every year) and the ever increasing cost of living in retirement, not to mention falling annuity rates, we are all going to to need significant pension funds when we retire.

For those of us without the benefit of a final salary scheme the costs of saving for our retirement have been increasing dramatically in recent years, however with the current demise of final salary pension schemes it is an issue that many more people will have to tackle over the next few years.

(Some new research published yesterday from the National Association of Pension Funds (NAPF) in their latest survey - Pension Provision and The Economic Crisis - shows that 52% of defined benefit ('final salary') pension schemes currently open to new members could close as a result of the current economic crisis. This is equivalent to around 1,000 pension schemes). 

The following tables of information provide some very sombre reading indeed, but the first steps in planning for a secure retirement are ascertaining exactly how much you will need and how much you will have to save you achieve the standard of living you are aiming for when you retire. 

Most people now lead much more pressurised lives and so ensuring you can look forward to a long and rewarding t=retirement becomes paramount.  Ensuring you plan adequately for retirement is therefore an absolute priority.

The first table shows us how much your pension fund will need to be worth when you retire (at age 55, 60 or 65) for a given level of net monthly income.  For instance the red figure shows that for a man to retire at age 60 with a required income of £2,000 per month after tax (obviously excluding any state pension) will need a pension fund of nearly a million pounds! (£934,579 to be precise).

Monthly IncomeRequired in Retirement		Size of the Pension fund you require to provide your desired level of retirement income
		Male				Female
		Age 55	Age 60	Age 65		Age 55	Age 60	Age 65
£1,250		£672,043	£584,112	£500,000		£676,895	£585,938	£500,000
£1,500		£806,452	£700,935	£600,000		£812,274	£703,125	£600,000
£1,750		£940,860	£817,757	£700,000		£947,653	£820,313	£700,000
£2,000		£1,075,269	£934,579	£800,000		£1,083,032	£937,500	£800,000
£2,250		£1,209,677	£1,051,402	£900,000		£1,218,412	£1,054,688	£900,000
£2,500		£1,344,086	£1,168,224	£1,000,000		£1,353,791	£1,171,875	£1,000,000
£2,750		£1,478,495	£1,285,047	£1,100,000		£1,489,170	£1,289,063	£1,100,000
£3,000		£1,612,903	£1,401,869	£1,200,000		£1,624,549	£1,406,250	£1,200,000
£3,250		£1,747,312	£1,518,692	£1,300,000		£1,759,928	£1,523,438	£1,300,000
£3,500		£1,881,720	£1,635,514	£1,400,000		£1,895,307	£1,640,625	£1,400,000
£3,750		£2,016,129	£1,752,336	£1,500,000		£2,030,686	£1,757,813	£1,500,000
£4,000		£2,150,538	£1,869,159	£1,600,000		£2,166,065	£1,875,000	£1,600,000
£4,250		£2,284,946	£1,985,981	£1,700,000		£2,301,444	£1,992,188	£1,700,000
£4,500		£2,419,355	£2,102,804	£1,800,000		£2,436,823	£2,109,375	£1,800,000

This tables assumes that you take an index linked (RPI) pension at retirement that is guaranteed for a minimum 10 years with a 50% spouses pension in the event of death after 10 years.

So how much do you need to save to build up an adequate pension fund?

The next table gives you some idea, lets take for example a 36 year old man who wants an income of £2,000 net per month at age 55.  If he doesn't start contributing into his pension fund until he is 36 he will need to save a contribution net of basic rate tax of £2,571 per month again highlighted red in the table. (This equates to £1,928 for a higher rate tax payer).  This also assumes he increases his pension contributions by 2.5% every year.

Monthly Income Net of 20% Tax	Initial Monthly Pension Contribution Required (Net of Basic Rate Tax - assuming a growth rate of 6% net of charges)
	Male retiring at age 55
	Age at which you start contributing into your pension
	25	31	35	36	37	38	39	40	41	42	43	44	45
£1,250	£686	£1,068	£1,475	£1,607	£1,756	£1,923	£2,113	£2,331	£2,582	£2,873	£3,216	£3,624	£4,116
£1,500	£824	£1,281	£1,770	£1,929	£2,107	£2,308	£2,536	£2,797	£3,098	£3,448	£3,859	£4,349	£4,940
£1,750	£961	£1,495	£2,065	£2,250	£2,458	£2,692	£2,959	£3,263	£3,614	£4,023	£4,503	£5,073	£5,763
£2,000	£1,098	£1,708	£2,360	£2,571	£2,809	£3,077	£3,381	£3,730	£4,131	£4,597	£5,146	£5,798	£6,586
£2,250	£1,235	£1,922	£2,655	£2,893	£3,160	£3,462	£3,804	£4,196	£4,647	£5,172	£5,789	£6,523	£7,409
£2,500	£1,373	£2,135	£2,950	£3,214	£3,511	£3,846	£4,227	£4,662	£5,164	£5,747	£6,432	£7,248	£8,233
£2,750	£1,510	£2,349	£3,245	£3,536	£3,862	£4,231	£4,649	£5,128	£5,680	£6,321	£7,075	£7,973	£9,056
£3,000	£1,647	£2,562	£3,540	£3,857	£4,213	£4,615	£5,072	£5,594	£6,196	£6,896	£7,719	£8,697	£9,879
£3,250	£1,784	£2,776	£3,835	£4,178	£4,564	£5,000	£5,495	£6,061	£6,713	£7,471	£8,362	£9,422	£10,702
£3,500	£1,922	£2,990	£4,130	£4,500	£4,916	£5,385	£5,917	£6,527	£7,229	£8,046	£9,005	£10,147	£11,526
£3,750	£2,059	£3,203	£4,425	£4,821	£5,267	£5,769	£6,340	£6,993	£7,745	£8,620	£9,648	£10,872	£12,349
£4,000	£2,196	£3,417	£4,720	£5,143	£5,618	£6,154	£6,763	£7,459	£8,262	£9,195	£10,292	£11,597	£13,172
£4,250	£2,333	£3,630	£5,015	£5,464	£5,969	£6,538	£7,186	£7,925	£8,778	£9,770	£10,935	£12,321	£13,995
£4,500	£2,471	£3,844	£5,310	£5,786	£6,320	£6,923	£7,608	£8,392	£9,294	£10,344	£11,578	£13,046	£14,819

As you can see from the above tables planning for a reasonable standard of living in retirement means saving significant amount of money and the sooner the better.  Of course you will get a state pension of £90 a week! from age 65 (or 68 depending on your age) so no one will starve but as for paying the bills, going on holiday, running the car and maybe a hobby or two........time start saving.

For those of us enjoying the benefits and low mortgage rates there as never been a better time to put this extra disposable money to good effect and also benefit from general tax relief.

If you wish to undertake a detailed review of your retirement plans and be provided with a full lifetime Cashflow model then please don't hesitate to contact us on 0116 2592371.  An example of our detailed financial plan can be viewed by clicking on the following link:  http://www.providentsolutions.co.uk/Financial%20Plan/Example%20Financial%20Plan%20v1.0.pdf

For more information about Provident Solutions Independent Financial Planning Review service please call us on 0116 2592371.