Could you spend £43,100 a year for the rest of your life without earning a penny more? No, I couldn’t either.
However, the pensions industry estimates that this is the amount typically needed to live comfortably in retirement (couples need £59,000). And, by the way, those figures are after tax. Before tax, you would need £50,887 of income, or £67,464 for couples.
If you think that’s exaggerated, you’re not alone. Fewer than one in ten households are in a position to afford a comfortable retirement that includes weekends away from home, treating loved ones to large meals from time to time, and replacing an old bathroom and kitchen every ten to fifteen years.
But more worryingly, a new study published last week revealed that around five million people – a third of workers who save in defined contribution pensions – are not even in a position to reach a minimum retirement level.
For those on low incomes, this figure rises to two-thirds, according to the report by the Institute for Fiscal Studies (IFS).
To give you an idea, a basic living standard costs around £14,400 a year (£22,400 for couples), according to industry figures from the Pensions and Lifetime Savings Association. That would see you spend around £95 a week on groceries, £100 a year on train tickets – but no car – and a week’s holiday in the UK each year.
The pensions industry estimates that £43,100 a year is the amount a person typically needs to achieve a comfortable lifestyle in retirement.
Rather than despair, the IFS has set out to improve the situation and has drawn up a list of ways to help everyone achieve a minimum level of retirement.
Before you dismiss them as just another think tank report, here’s why the IFS’s ideas are worth paying attention to. They have attracted a very eager and influential listener: the pensions minister. At a Westminster event to launch the report last week, Emma Reynolds MP could not have been more keen to emphasise the very high level of regard she held for the IFS and its work on pensions. “We value very much the expertise of the IFS, the strength of its research and the contribution it makes to the public debate on pensions policy,” she enthused.
“I look forward to working with the IFS on their own pensions review and ours.” And if you needed any more proof that the IFS’s ideas could become government policy, this is it: Emma Reynolds didn’t leave.
When ministers attend industry events, they typically make a short speech, receive applause, and then disappear in a whirlwind of urgency and importance.
Last week, at an event in Westminster to launch a report by the Institute for Fiscal Studies (IFS), Emma Reynolds MP spoke briefly… before sitting down to watch the remaining submissions.
Instead, Reynolds spoke, offered to take questions (though he avoided the one asking what he thought about pension tax relief), and then sat in the front row listening intently to the presentations for the next hour.
What does the IFS propose then?
The most radical suggestion was that workers should receive pension payments from their employer even if they choose not to make the payments themselves.
Currently, under the automatic enrolment rules, employers must contribute the equivalent of a minimum of 3 per cent of the employee’s salary to his or her pension and the employee must contribute a minimum of 5 per cent. But if the employee chooses not to make the contribution, the employer pays nothing.
Our very own Jeff Prestridge was awarded Best National Journalist
2024 by the Association of Investment Firms at its annual Media Awards last week.
The association supports and promotes the long-term benefits of trusts and investment companies and singled out Jeff, our group wealth and personal finance editor, for his unrivalled coverage of investment companies, notably in his weekly Fund Focus article in The Mail on Sunday.
Jeff Prestridge with his award last week
This single rule change could boost workers’ pensions by £4bn a year, says Mubin Haq, chief executive of Abrdn Financial Fairness Trust, which partnered with the IFS on the report.
The danger is that workers would be more willing to give up their share (something that is rarely a good idea) if they still received contributions from their employer.
He also suggested that automatic enrolment should be open to everyone aged 16 to 74, a massive expansion from the current range of 22 to state pension age.
And if the IFS gets its way, workers earning £35,000 or more would automatically pay more into their pensions. For example, they could pay 12% on earnings above £35,000, with the extra cost borne by them rather than their employer.
At the moment, auto-enrolment only applies to incomes above £6,240, but the IFS is proposing to reduce this figure to zero. This would clearly be positive for people’s pensions, but difficult for those on low incomes.
But to make things easier, the IFS suggests putting these extra contributions into a savings account that can be accessed if needed, or saving for retirement if not.
The IFS also proposed implementing a form of automatic enrolment for the self-employed. Only 20 per cent of self-employed people earning more than £18,000 a year are saving for a pension. If you think retirement prospects are worrying for employees, they are nothing compared to what millions of self-employed workers may face.
The IFS’s most radical suggestion was that workers receive pension payments from their employer, even if they choose not to make the payments themselves.
So, are these good ideas?
Well, they add complexity to the auto-enrollment system, which has been successful precisely because of its simplicity. The current system is easy to understand, requires no input from workers, and simply works in the background. We’ll have to see if tweaks and changes upset the balance.
But the IFS believes they could boost pensions for those on track for low and middle incomes by £1,400 to £2,100 a year, and reduce the take-home pay of the lowest earners by less than 1 per cent. Not bad. It might not get us into a comfortable retirement, but it could make a difference.
Your tip for saving £5,000 on a renovation…
How do you decide when to save and when to splurge?
I received some pearls of wisdom from readers when I posed this question to them last month. Molly G responded to my comment that she had been hesitant about whether to buy a jacket or not.
She emailed: ‘My answer to you is, please stop worrying and allow yourself to go with the flow. 60 quid on a jacket is nothing!’ DollyGirl1 gave this advice: ‘My school godmother taught me 60 years ago that when I have some money, I should ‘spend some, save some and give some away’, which I still think is a great philosophy. I’m still working on it after all these years.’
But the last word must go to Gina from Hampshire. “In 1988, I found myself lusting after a £100 jar of facial treatment, marketed as a dream come true to stop the passage of time,” she writes. “It was a sticky, pale pink, iridescent liquid and I just ‘had’ to have it.
‘My husband asked in disbelief: ‘Did you just spend £100 on face lotion?’
I replied: “No. I just saved myself £5,000 on cosmetic surgery!”
Do you agree with his advice and strategies? Let me know.
Some links in this article may be affiliate links. If you click on them we may earn a small commission. This helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationships to affect our editorial independence.
