The pension saving rule of thumb states you should take the age you start pension saving and halve it, and then contribute this pre-tax sum to pension for the remainder of your working life – a 40yo would contribute 20% of income to retain their standard of living
iii) There is confusion and a lack of understanding in relation to financial matters, particularly pensions and investments
As an independent financial adviser (IFA) these conclusions leave me with mixed emotions…
We have a recession looming in the UK and the much promoted “Cost of Living Crisis” is eroding any disposable income people have left. If savings levels are already inadequate, then this issue will only be compounded by the current situation. The full State Pension provides only limited support in retirement – in fact it’s worth less than the minimum wage of a full-time employee over 18 – but there is an overreliance on this entitlement.
Like spending, saving is habitual, and a formalised plan can help to instil discipline. In my own experience, I did not believe I had enough income to begin a savings plan but felt the pressure to take a long-term view, with ‘rainy days’ and retirement planning in mind (frankly, I’d be a hypocrite if I didn’t!). Once I selected a suitable savings vehicle – I wanted flexibility and exposure to growth opportunities, so chose a stocks & shares LISA and a Personal Pension –, I committed to a moderate monthly contribution; £50 pcm. Initially this sum had a noticeable effect on cashflow, but I soon adapted, and in time, the contributions increased. I provide this [dull] anecdote to illustrate how accessible saving/investment can be and how it can promote financial discipline.
The underlying asset exposure is of course a key part of the equation, and this is where much confusion and fear can be rooted. Stock markets are volatile by nature and values can fluctuated greatly, which discourages those which are risk averse. However, this asset class has an attractive return profile over the economic cycle and investment into such areas can boost your savings/retirement pot. Conversely, cash provides certainty but performance lags inflation and your wealth is diminished over time. A balanced approach which incorporates diversified and complementary assets is often the best approach, providing short-term certainty alongside long-term growth opportunity. The effects of compounding emphasise performance.
It can be all too easy to disconnect with a topic that overwhelms, and applied to finance, people rationalise this by considering stocks & shares and tax-efficient planning something for the wealthy; this couldn’t be further from the truth. The range of open investments and tax wrappers assist everyone and meet a wide range of needs and priorities. Your local financial adviser can assist you here.
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