Lost in the swamp of dodgy surveys that make up much of the financial PR output is one that found that, for a large part of the population, buying a lottery ticket is their only form of pension “planning”. Auto-enrolment has changed that, with millions more now saving through company schemes. But a slew of figures out this week tell us just how tough the challenges ahead are.
£61,897
That’s the average amount sitting in pension pots after a lifetime of saving.
In total, 645,000 people accessed their pension pots for the first time in 2018-19, according to data from the Financial Conduct Authority, and they had savings totalling £40.1bn.
It will get you an income of only £2,500 a year, and even if you add the state pension, you’ll still be below the current minimum wage. Good luck surviving on that.
The true picture is probably a fair bit brighter: lots of people have more than one pension pot, with the average brought down by many half-forgotten schemes when people were younger and worked briefly for other employers (one tip to find them: use the Money Advice Service’s tracing guide). Lots also have buy-to-lets for their retirement, which don’t feature in the FCA data at all. But only one in eight of all pension pots in the FCA data were over £250,000, which is the minimum most people are going to need. How much money you will really spend in retirement sparks lots of debate among my colleagues (we’re a fun bunch on the Money desk). I like the Which? survey of its members (and yes, there’s probably a middle class tilt there) which found that retirees typically spent £2,220 a month in 2019, or about £27,000 a year.
£2,700
That’s the average sum paid into a pension by individuals in Britain in 2017-18, according to HMRC this week.
It’s actually down from the year before, when it was £2,900. That’s partly because auto-enrolment helped bring in an extra 1 million savers during the year, many in lower-income jobs, which takes the average contribution down. But however you look at it, £2,700 a year – £81,000 over a 30-year working lifetime – is not going to provide for much, unless the employer pays at least the same amount.
48%
That’s the proportion of pension plans that were accessed in 2018-19 without any financial advice, said the FCA.
Should you buy an annuity? Do drawdown? Take the 25% tax-free lump sum? Take it all in one go? Leave your scheme crystallised or uncrystallised? As Mark Futcher of advisers Barnett Waddingham says: “What’s really concerning is the number of retirees who are clearly flying blind.”
Trouble is, where do you go for advice? We have a shambolic approach which largely relies on a mate who might be able to recommend someone who may not be half bad. Instead, we need employers to step up. They put lots of money into pension schemes, too – why are they not there when their workers retire? Employer-sponsored and paid-for advice at retirement needs to be legally mandated by the government.
£185m
There’s something called the “lifetime allowance” in pensions. If the value of all your pension savings exceed it, then you pay extra tax at up to 55% when you try to get hold of the money. Currently the lifetime allowance is £1,055,000, which sounds a lot, but in the last tax year HMRC took £185m off people who had exceeded it. Maybe you think a £1m pot is plenty, but it’s one of the reasons why doctors stopped working as they fell into the “tax trap”. It sounds like a progressive measure, but what if you invested cleverly and your pension pot went up in value, breaching the limit and then exposing you to high taxes? The limit should be scrapped, while retaining the £40,000 a year annual contributions cap on how much you can put into a pension and get tax relief.
8%
That’s the most common withdrawal rate in 2018-19, said the FCA. In other words, for every £10,000 a person has in a pension, they take out £800 a year. It’s a crazily high figure to be taking from your pension if you want it to last across your retirement. Even half that is ambitious. You should aim for a fund where you draw down about 3%-4% a year, given that once you reach 65 you are likely to live another 18.6 years if you are male, and 20.9 years if you are female. The better news is that the FCA said that for people with big pension pots, the typical withdrawal rate is in the 2%-4% range. What the withdrawal figure really shows us is the huge disparity between the rich and poor on pensions.
p.collinson@theguardian.com
