Government want you to save £320,365

marathonic

Would I be correct in my interpretation of the following:

The long-term target is for 40% of pension income to come from state and 60% from private provisions (source)

The new flat-rate pension will be £144 in today's money.

An annuity with a 50% spouse's pension and rising by 3% p/a for a 65 year old provides £3,506 per £100,000 in the pot (source).

If £144 represents 40% of your total retirement income, you need to provide £216 - or £11,232 p/a.

To provide this would require a pot, in today's money, of £320,365.

For a 20-year old on a salary linked to inflation, this might require contributions of about 12.5% in total (employer+employee).

For a 25-year old, it might require 15.25% and, for a 30-year old starting out, it may be 19.25%.

The above calculations ignore tax-free lump sums and income tax in retirement and use the standard assumptions of H-L's pension calculator using a salary of £25,000.

Linton

I havent seen the 60/40 figure before (and your source link doesnt help). At first sight it would seem to be a reasonable average rather than something the government wants, though for an ex-working couple that works out as a household income of about £37K which as an average seems rather large to me.

However I agree with your interpretation about the order of magnitude of pension pot that people need to accumulate and the necessary contribution.

marathonic

Sorry, I'd used the wrong source link. It's edited now

hugheskevi

The long-term target is for 40% of pension income to come from state and 60% from private provisions

That was a target the Labour Government had in the early 2000s, which seemed to be quietly dropped as there was little progress toward it.

I haven't heard the current administration voice similar ambitions.

There was always the issue of how you treat earnings, investment income and other income in that ratio - ie does it count as private provision, or is it outside of the calculation. I believe the definition incorporated them as private provision. It is important as those things make up 28% of pensioner income, so if you include them you are halfway toward your target before any private pension is taken into account.

There also definition issues - eg, what is the difference between income from personal pension and income from annuities - logically, it would be the difference between drawdown and annuities, but the questions on that survey are ambiguous. That is probably because the survey dates back to the mid 1990s when DC provision was less important than today and what it will be in the future so ambiguity was less important when the questions were designed.

The new flat-rate pension will be £144 in today's money.

The definition of benefit income used in the calculation also includes all benefits aside from State pension.

In particular, disability benefits, Housing Benefit and Council Tax benefit. Also Pension Credit, although that will be less significant in the future.

If £144 represents 40% of your total retirement income, you need to provide £216 - or £11,232 p/a.

As with all calculations based on averages, this is only right for at best a very small number of individuals.

The average pensioner wouldn't be getting disability benefits, council tax benefit or housing benefit so in this case it probably isn't relevant for anyone (in the same way the average person at retirement is about 85% married - but no individual is 85% married).

For a 20-year old on a salary linked to inflation, this might require contributions of about 12.5% in total (employer+employee).

For a 25-year old, it might require 15.25% and, for a 30-year old starting out, it may be 19.25%.

Depends on income.

Government long term targets come and go, and routinely change. No one would seriously plan their future on them. As to how much the Government 'wants' you to save privately, it depends on income - a more modern version of 60/40 would be based on a weighted average of what % of their income prior to retirement folk need in retirement, based on the %s outlined in the Pension Commission report.

This is conventionally assumed to be quite high (and provided mostly or entirely by the State) for lower earners, going down to perhaps 50% or less for higher earners (relatively little of which will come from the State).

marathonic

Linton wrote: »

I havent seen the 60/40 figure before (and your source link doesnt help). At first sight it would seem to be a reasonable average rather than something the government wants, though for an ex-working couple that works out as a household income of about £37K which as an average seems rather large to me.

However I agree with your interpretation about the order of magnitude of pension pot that people need to accumulate and the necessary contribution.

Some food for thought there. I'd imagine that there would be one significant pension pot and one smaller for most couples due to one taking time off due to children and so on. It's for this reason that I selected the annuity with 50% spouse's pension.

Let's take a couple who, due to one partner being out of work for a quarter of their working life to raise children, their personal pension provision would be reduced from £216 to £162 per week. This would give a retirement income of a bit over £34,000 for the couple. I agree that this is high, but not overly so.

If a couple with children didn't take time off work to raise their children, it would suggest that they paid for childcare which would imply that they're on above average salaries and that, perhaps, the £37k may not be so high after all.

Jack_Griffin

https://www.pensionspolicyinstitute.org.uk/default.asp?p=71

State Pensions: General

Table 4: Average proportion of pensioner income paid from state and private pension provision[1]

[1] PPI analysis based on DWP (2012) Pensioners’ Incomes Series 2010/11

Year...State...Private
1997/8 55% 45%
1998/9 54% 46%
1999/0 55% 45%
2000/1 53% 47%
2001/2 55% 45%
2002/3 56% 44%
2003/4 54% 46%
2004/5 54% 46%
2005/6 55% 45%
2006/7 53% 47%
2007/8 52% 48%
2008/9 54% 46%
2009/10 54% 46%
2010/11 54% 46%
Target 40% 60%

marathonic

hugheskevi wrote: »

Government long term targets come and go, and routinely change. No one would seriously plan their future on them.

That's a good point and, in fact, my personal planning (at the age of 30) assumes the state pension will no longer exist.

If this post serves no other purpose, maybe it'll provide another 'rule of thumb'.

If someone goes by the half-your-age rule of thumb, they'd contribute the following to their personal pension:

10% of salary if starting at 20
12.5% of salary if starting at 25
15% of salary if starting at 30

If they use the above, outdated, government plans, they'd contribute:

12.5% of salary if starting at 20
15.25% of salary if starting at 25
19.25% of salary if starting at 30

Whilst I agree that things will change, selecting a percentage of salary to direct towards a pension will always be difficult and rely on a large number of assumptions.

If a particular set of assumptions requires you to contribute a higher proportion, you're probably better to err on the side of caution and use those assumptions if possible.

The other rule of thumb I've heard is that you should have £35,000 in your pot by 35. This ignores salary and is probably just a figure to provide for an average retirement.

hugheskevi

If they use the above, outdated, government plans, they'd contribute:

12.5% of salary if starting at 20
15.25% of salary if starting at 25
19.25% of salary if starting at 30

Abstracting from the £144 being far too low a figure for what should be used, as the previous plans included earnings, investment income and other income, you need to factor those in.

That roughly halves the required private pension needed, which in turn would halve the contribution rates above.

Take into account that £144 being too low would mean the estimated contribution rates would be too low, and you would need to add something back on to the new contribution rates to get the 'right number.' Intuitively, I suspect it would be in the region of about 20% - you could get the exact number by looking at DWP long term forecasts.

stinktankcynic

If you work all your life, the government expects you to pay into a pension for years and just get the same in private pension as someone will get in benefits for contributing nothing. The goalposts are moving further and further all the time.
The government and insurance industry tell you what's best to do.... For them, then they pull the rug from under you. The whole idea of money could be changing, perhaps a big reset is coming.

jamesd

You're using pretty high income targets there. Current average net income for pensioner households is £369 a week, £19,188 a year. So your initial target ends up approaching twice the average pensioner household income. Your numbers are way higher than actual needs for pensioner income.

Two people on £144 a week end up getting £14,976 of that average net household income leaving just £4,212 between them to get there, just £2,106 a person.

The problem with such elevated numbers is that they discourage those who can do very nicely for themselves but who don't need a raise when they retire.