Pension advice needed to avoid retirement shortfall

Pension advice needed to avoid retirement shortfall

Once again, the latest figures show just how much pension advice is needed to help people to avoid a retirement shortfall.

This is not new. We’ve seen year after year that the problem is just getting worse. People are just not saving enough for their retirement. The latest shortfall is now expected to be £12,000 a year, according to Royal London. This is based on an expected retirement income of £48,000 including state pension, which is what people say they need to retire comfortably.

The calculation is based on a 22-year-old being paid £24,000 a year. Then retiring at 67, having made pension contributions of 8% each year and had annual pay rises of 2.5%. That would generate a pot of £468,000 which would pay £36,000 a year including the state pension.

Pension advice is clearly needed to make up the £12,000 shortfall and the sooner people get that advice the better.  According to the survey 60% of people acknowledge this. But only 11% of people currently pay 3% more than the minimum into their pension in order to bridge the gap.

Pension Bee have just released some even more startling figures claiming that a lack of pension advice could cost you up to £500,000 at retirement!

This analysis is based on several factors. An important one is lack of investment strategy and active management. Over 90% of pensions are sat in default funds and not being actively managed. Pension Bee calculate that at 3% growth in a default fund investments could grow by £194,000 but if they earned 7% in an active investment they could earn £500,000. Add in contributing an extra 5% a year and that could earn another £120,000 by retirement. Paying too much in charges can also reduce your retirement earnings.

All food for thought.

Wealth transfer advice is also important.

For those who took pension advice and have more than met their retirement needs, so called High Net Worth individuals (HNW) face different issues in terms of how to transfer their wealth. According to Charles Staley research:

• 40% of HNW individuals don’t have a Will in place.
• Only 29% have set up a trust to help them with tax planning.
• Less than 20% have a simple Letter of Wishes in place, and
• Less the 25% have Lasting Power of Attorneys set up.

That’s all despite 80% of HNW individuals saying that they have spoken to a financial adviser. All HNW individuals that have ever seen Christina have all received advice about their wealth transfer plans. As far as we are concerned this is an integral part of the overall advice process.

HNW individuals lacking confidence.

Whilst some HNW individuals need help with their wealth transfer planning. Those who have already sorted their plans are concerned about the state of the economy. According to Saltus Wealth:

• 36% voted Labour at the election and only 25% voted Conservative.
• Of those who voted Labour 66% say that they regret voting for them!
• Reasons for regretting voting Labour included increases to Inheritance Tax, VAT on school fees, Increases to Employers National Insurance and losing the Winter Fuel Allowance.
• 85% expect the government to increase taxes again.
• Overall economic confidence is now 48% down from 84% when Labour was first elected.
• 43% think that the tax system is too complicated and is holding back growth.

A third are also now making sure that they maximise their ISA allowances in order to avoid rises in Capital Gains Tax and a similar number are doing so to avoid some of the new Inheritance Tax rules for pensions which are on their way.

Women put their children first.

For those who have put wealth transfer plans in place, there is a big difference between how men and women think! Charles Stanley found that:

• 45% of women put the needs of their children first when thinking about passing on their wealth.
• Only 33% of men put the children first.
• 37% of men put their wives first.
• But only 17% of women put their husbands first!
• Women are also more likely to maximise their ISA investment allowances than men are.
• Women also take an average of 11 years to save for their first house deposit, whereas men only take an average of 3 years. This is because men earn an extra £422 a month on average but also save 40% more than women.
• But also, because women gave to save for a bigger deposit because of their lower earnings. Doesn’t seem very fair does it.

Interesting findings.

Men have bigger pensions.

Consultancy firm Broadstone have found that men’s pension pots are likely to be twice as big as their female colleagues. That’s because men contribute a higher percentage of their salary into their workplace pensions. But also, because women tend to take time out of the workplace having children and the fact that women are still paid less than men in many occupations.

The disparity only gets worse with time. By the age of 55 the average private pension for men is £24,000, but for women it is only £6,800 between three and four times less.