A report by Royal London has revealed the battle faced by over a third of UK consumers. Day-to-day spending needs mean that many are finding it impossible to save for retirement. But there may be a solution in the form of one-off opportunities, if these can be identified in time: the savings ‘Moments of Truth’. Article by Nick Green.
Saving. It’s all very sensible. Yet sometimes it’s hard to make sense of it. How can you save for tomorrow when you can barely afford today? And why must it be that the best time to save (when you’re young) is exactly when you seem to have the least cash and the most responsibilities?
It’s a dilemma many people struggle with. Royal London’s report ‘Pensions through the Ages: Generation 2050 and beyond’ found that a third of people aged 18 to 40 were not saving at all for their retirement, and considered they were not likely to do so in the future. An even larger proportion (41 per cent) of those aged 30-40 said they intended to rely solely on the state pension. Most pessimistically of all, many of this age group believed they had ‘left it too late’ to start saving into a pension.
Why the Squeezed struggle to save
As any adviser will tell you, pension saving is best started early. The longer your money is invested, the more compound interest has a chance to work its magic (you can see this dramatically demonstrated here). But the next report in Royal London’s pensions series, ‘Feeling the Squeeze’, highlights the competing pressures that keep people from saving into their pensions as early as they should.
Financial needs such as saving for a home, paying a mortgage, paying off debts and loans and raising children, are regularly taking priority over long-term saving for retirement. In a survey of 35-44 year olds, the report identifies 34 per cent as ‘Squeezed’, meaning that they struggle to meet everyday financial commitments such as bills (a further 6 per cent say their finances are ‘Unmanageable’, i.e. even worse).
Among the ‘Squeezed’ group, saving for retirement is among the lowest financial priorities, coming below saving for a property, saving for a rainy day and enjoying the here and now. Yet this isn’t down to lack of awareness: more than nine in 10 (92 per cent) agree that they should be saving or investing, and 83 per cent admit that they should be doing it more.
The Savings Moments of Truth
A majority said that they would save more given a change of circumstances – such as a pay rise, a windfall, or the end of another existing financial commitment (e.g. childcare). It’s these shifts in circumstances that create opportunities for pension saving. The challenge for savers is to spot those opportunities and seize them – rather than give in to the temptation to spend the extra money.
For example, average monthly childcare costs are £245 for those families that need it. Individuals with personal loans spend an average £242 per month repaying these, while credit card interest repayments come to an average of £244 per month. All of these are expenditures that will be (or could be) temporary. When children leave childcare, when the loan is settled, or when the credit card bill is regularly paid off in full – each of these can free up over £240 per month.
The report calls such milestones the ‘Savings Moments of Truth’ or Savings MOTs. So what could you do for your pension by achieving just one of these MOTs?
The Savings MOT in action
Assuming you’re a basic rate taxpayer and that your pension pot achieves average growth of 4 per cent per year, this is what would happen if you were to start saving aged 40.
|Tax relief at 20
per cent adds
|Total monthly sum saved
|Total yearly sum saved
|After 25 years saving at 4% growth, this gives a pension pot of:
So if you were to achieve just one of those savings MOTs and divert the proceeds into your pension, then – even starting as old as 40 – you could accumulate a pension pot of £155,567 by the time you’re 65. (For the record, the average size of a pension pot in England is under £100,000.)
Even better than this, however, is the difference between the amount you pay in and the amount you could get back (thanks to tax relief and compound interest):
|Total amount you paid in:
|Total extra gain on top of this:
In this example, you would more than double the money you paid into your pension. Even assuming a much lower rate of growth – say, 2 per cent instead of 4 – you could still walk away with a pension pot of over £117,300 by age 65, of which £45,300 would be growth on top of your original investment.
Seize the moment
Now we see what a large retirement fund can be built up, even late in the day, simply by eliminating one regular monthly cost. So if your kids are due to finish childcare in a couple of years, if the finance deal on your extension is coming to an end, or if you can get the credit card bill under control, then think hard before just putting that spare cash in the bank. By funnelling at least some of it into your pension, you can look forward to a retirement in which you’re no longer so financially squeezed.
For most of us, the windfall or huge pay rise will always be a daydream – so don’t wait for the big event to happen before deciding to save. As these findings show, what you need to watch out for are the little moments, the small opportunities – because over time it’s these that deliver the biggest rewards.
If you’re starting to save into a pension, or wondering how to do it more effectively, talk to a financial adviser.