Your Money Magazine :  New A Day Pension Regulations

A-Day.......the first day of the rest of your life....... and that could be a very long time!

As you may have been reading in the papers, the 6th April 2006 brought a new set of pension regulations into force.

Now, for the first time, investors have been given huge scope for tax saving investment. You are now able to save upto 100% of your income and get all of your tax back!

"Who can afford to do that?" I hear you ask, and of course the answer is very few of us. However, one must ask why the Government has made the tax relief limits so high at a time when, it has to be said, the Treasury is not awash with spare cash?

The answer is because it is terrified - and so should we be!

We just aren't saving anywhere near enough money to see us through our old age, and the situation looks set to get worse.

Medical advances, improved prosperity and public health improvements have led to an increase of 13 years in the life expectancy of the average male over only the last 16 years since 1990. By 2010 this could mean that the average male will make 90, which means if you are thinking of retiring at 60, this could mean 30 years of income (with inflation proofing) will need to be provided from your savings, with only small assistance, if any, from the Government.

So how much might you need when you do eventually retire?

That's a tough question, and the answer depends on your expectations, standard of living and personal aspirations. However, to give you some idea of the scale of the problem, I have been doing some research.

Talking to my retired clients and looking at their out-goings, etc, I have found that the average couple, in a 3 bedroom house, with average tastes and social activities, is spending around £17,000 per annum of net income (let's say, £20,000 in gross terms).

This is derived from various sources, and it has to be said that for those who are already retired, quite a sizeable part comes from the State pension and State Earnings Related Pension.

For some, final salary scheme benefits play a major part, as do other pension benefits secured from money purchase schemes, at a time when annuity income rates were far higher than they are these days.

The remainder comes from savings, or from continued employment (part time) to keep the wolf from the door.

Few of us are lucky enough to be in final salary schemes these days, and indeed, for the most part, these schemes are in trouble and considering closing, or at best, reducing benefits so that they can afford to stay open.

For many of us the State pensions will also be meagre as, since the link with average earnings was broken, their real value to those retiring has diminished. There is also talk of 'means testing' which will reduce the number of recipients of the money in future.

Let's take a look at some figures:-

If we make a few fairly conservative assumptions, we can calculate how much free capital one might need to provide the necessary level of income. We can then make some projections forward, which take into account inflation, and see what level of capital one might need in the future.

Let's assume therefore that capital could, if put to work, yield about 5% per annum gross plus running costs. We can quickly see that for our target £20,000 per annum we will need £400,000 as a capital sum. If we want to take into account inflation in the future, then we might need perhaps a little more!

So our target for a couple who are just retiring today would be to produce at least £400,000 of capital upon which they could live for perhaps the next 30-35 years. That is, of course, capital which is not tied up in the home.

Don't delay or you will pay dearly for waiting!

Obviously one cannot amass a sum of this size overnight! It is therefore vital that we all start to save early.

It might interest you to know that if you are 40 today and want to retire at 65 with a target income of £20,000 (in today's money, but increased in line with inflation) you would need to be saving around £762 per month into a pension (assuming a reasonable rate of investment growth and income rate at retirement).

That is, of course, a huge amount of money, but if you delay saving for just 5 years the amount increases to £1,186 per month to make up for lost time, and if you wait 10 years, to around £2,000 per month.

Have a play on the internet with this useful calculator from Scottish Widows plc.

The calculation assumes that you will eventually buy an annuity with your fund rather than drawdown your income. If you choose drawdown you will have to save quite a bit more. This is due to the fact that annuities are cross-subsidised (at the moment) by those who die earlier than expected!

Relying on your property as a source of capital when you retire (as many people currently are) is also folly.

House prices are historically high and have moved 'off trend' by quite a sizeable margin.

There are various schools of thought as to where house prices might go, but over time all asset classes, including property, return to fair value and come back to trend.

This correction could come in the form of a sudden fall in prices or a long term stagnation in the market or even a combination of the two. Just because there is no sign of it yet, doesn't mean it won't happen!

It has always happened in the past...see the graph below.

Whatever your view of the property market, downsizing your house may not be the whole answer to the problem.

Even moving from a £500,000 house to a £300,000 would only release around £200,000 (less after expenses and moving costs). As we saw before this might give rise to only half the income you might need. You still need to save to fund the other half!

So, as you will understand, we are all faced with a harsh dilemma. Do we spend now and regret having failed to save when we want to stop working? Or do we cut back now and squirrel some of our hard earned cash away for later? Or, indeed, do we bank on working, and being able to find gainful employment, until we drop?

These are your choices........

I know what I am going to do, and if you want to join me and plan for a more comfortable retirement, call Grant Hughes at Charlwood Leigh on 01372 374444 so that we can start to prepare for your future now.

"THE TIME TO MEND THE ROOF IS WHEN THE SUN IS OUT, NOT WHEN IT'S ALREADY RAINING!"

Grant Hughes Dip PFS

For further advice and information and a free consultation, please contact us .