PensionsSep 5 2019

What should clients be saving at different points in retirement?

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What should clients be saving at different points in retirement?

It is commonly acknowledged that people need to start saving sooner than later to fund their retirement life. 

But the amount that clients need to save can vary depending on how close the individual is to retirement. 

So what should clients be saving at different points to the path to retirement? 

Several in the industry stress that the first point in the retirement journey should be for individuals to maximise their occupational pensions. 

Employer pensions 

Sir Steve Webb, director of policy at Royal London, said: “Clients need to have a mix of short-term and long-term savings strategies, though the balance of these will shift over time.  Most people need a cash buffer to tide them over short-term spending pressures and to avoid having to resort to high-cost credit." 

Sir Steve stresses that individuals should maximise the amount of employer pension contributions that they can access.

He adds: “For example, if an employer will offer matching contributions up to 7 per cent then a worker who is paying at the automatic enrolment minimum of 5 per cent might want to prioritise the extra 2 per cent.”

Udit Garg, head of wealth management at Sun Global Investments, says: “It is important that people have more guidance and understanding in the ways they can boost their retirement including state benefits, diversifying and maximising employer’s contributions.”

Fiona Tait, technical director at Intelligent Pensions confirms this view. 

She explains: “Those in their twenties and thirties should take advantage of any workplace pension scheme, where contributions are deducted from salary before it is received and spent and where the funds are managed for them by investment professionals.”

The forties and fifties 

Ms Tait highlights how pensions need to be reviewed as individuals dive deeper into the accumulation phase, typically as individuals hit their forties. 

“For people in their fifties and sixties the approach should remain the same however, the focus sharpens as they start to form a more coherent picture of when and how they want to stop work.”

Ms Tait points out how cashflow plans are often used at this stage to provide a more specific level of saving, taking into account other assets and income sources. 

She adds:  “It is also at this stage that tax restrictions are more likely to come into play and advisers may offer annual and lifetime allowance planning and recommend alternative savings vehicles to complement pension savings.”

Retirement Pathways 

Some in the industry mentioned the concept of retirement pathways, and advisers need to highlight the value of tailored retirement plans, which can avoid individuals having to self-manage their pension pots. 

Mr Garg says: “Following on from the FCA’s Retirement Outcomes Review earlier this year, it was made clear that many people are unsure about their investment pathways as there are many more complicated options and decisions [that can now be made].”

He adds: “This means that the damning verdict is that people don’t know where to invest, or how much income to take which could cause serious problems with their retirement.”

He stresses that advisers should be providing guidance on drawdowns, as this is a field in which many fall victim to, and it is important they are offered guidance on the best ones to consider. 

Mr Garg identifies four types of individuals that the FCA is consulting to help people make more improved drawdowns: 

  • Consulting with those who have no plans to touch their money within the next five years
  • Consulting with Individuals who plan to use their money to set up a guaranteed income (annuity) within the next five years
  • Those who are taking money as long-term income within five years.
  • Those who are withdrawing all the money with five years.

Ricky Chan, chartered financial planner and director at IFS Wealth and Pensions, says: “Providers can offer up to four investment pathways using prescribed FCA descriptions of objectives.” 

But as the underlying investment asset allocation is decided by the providers, Mr Chan is concerned that different providers may take a different approach meaning that an investment pathway between two providers could invest funds differently.”

Going beyond the minimum 

Many experts stress that saving beyond 10 per cent of a salary throughout the retirement journey is essential to secure a sufficient pension pot. 

Mr Garg says: “It depends on how much the individual has and also what their overall aims are. Many recommend saving around 10 per cent - 15 per cent of your income in your 20s and building on this over time.” 

The 2018 Financial Power of Women report by Fidelity International that reveals that the average pension pot for a man between 25 – 34 would need to be worth around £142,836 by the state pension age of 68.

“To put this into perspective, if you were to leave saving up until your 50s you will need to save on average, £1,445 a month to achieve £23,000 annual income at retirement which means that many will be put under serious pressure if they do not accumulate beforehand,” warns Mr Garg. 

Sir Steve says that the second priority after maximising employer contributions is  “nudge up savings rates when pay increases". 

He adds: “For most people, a combined employee and employer savings rate in the 12-15 per cent range is likely to generate a decent pension pot provided that saving starts reasonably early in the working life and is not interrupted, for example by long periods out of the labour market owing to family commitments or poor health.”

saloni.sardana@ft.com