What is the true cost of a pension
Well, it could be a LOT less than 'some' experts tell you
So what is the true cost of a pension?How hard can it be - to tell people the TRUE cost of a pension?Click To Tweet
It sounds like a simple question eh?
But it’s seemingly impossible for some financial journalists to get to the bottom of it – as I summarised in this short video
So, in this essential Insight we’ll see how the Press can mislead us about pensions – and put us off saving anything at all.
This issue affects millions of people – so please share if it’s relevant to a friend or family member.
I honestly believe they’ll thank you for it 🙂
Now . . . I’ve observed the Pensions and Investment industry (from the inside and out) for many years now and, sadly, the press very seldom help you to navigate it.
Indeed some of their stories are so scary and misleading that they can put you off making any pension saving at all.
The media are good at grabbing people’s attention with ‘scary’ headlines and they have a formula for that.
You’ll generally find that their stories:
- Involve some ‘conflict’ (between good and evil – with the bank or insurance company or the government as the oppressor)
- Have a ‘human’ element (about Jenny and Phil and their 3 ‘lovely children’ from Weston Super Mare for example!)
- Have some ‘Odd’ or curious element to them (Man bites dog etc)
They try to avoid ‘boring’ for the obvious reason that it doesn’t sell papers – or produce ‘clicks’
What worries me – is that their obsession with scary or odd stories is having a very bad effect on the long term wealth of the nation.
And that’s a serious issue because you need to understand your money to make better decisions about it.
Poor quality or Misleading information can cost you tens or hundreds of thousands of pounds over the long term.
Now, my aim with this site is to help you steer a path through all this noise – with solid ideas and general guidance to help you build your wealth.
And here’s my guidance on some common but silly pensions stories you’ll find in the press
To be clear, these are just 2 of many examples of this story.
And these examples are taken from good quality media outlets – the BBC and the FT.
Obviously, the ‘lesser’ quality newspapers and media outlets get this stuff wrong too – and just as often and just as badly – if not more so.
Indeed, in my experience, very few consistently get their facts right or the stories balanced when it comes to pension planning.
In their defence, the media might blame the ‘expert’ financial advisers for some of their misleading messages.
It is, after all, the external experts that they turn to for the numbers upon which they build their stories.
But let’s be honest here. The real reason we see so many ‘shocking stories’ (about pensions or anything else) in the press is because journalists are trained to develop them.
So take their stories with a ‘pinch of salt’ 🙂
Shocking is Newsworthy!
John Smith saves steadily for a decent pension . . .
is NOT a good headline or News story.
It’s just a boringly good outcome for John !
And, I’m afraid YOU won’t find that story in the press.
So, you’re left to decipher the facts from the fantasy in the scary stories.
Now, there is ONE reliable source of insights on pension and investment planning.
And you can get updates from that guy by signing up to his newsletter here 😉
Now, to those silly Pension stories
In March 2016 the BBC ran a story with the headline:
Workers should double their pension savings, says Labour’s review.
And they went on to say, ‘The Independent Review of Retirement Income (IRRI) suggests the target for savings should be 15% of salary – a considerably higher level than has been suggested previously.
And just last month (July 2017) we got the following headline in the FT to tell us that even YOUNG Britons need to save a phenomenal amount for their pension!
The question you need to ask is – are they right?
This is the BBC and the FT after all 🙂
So, should everyone save 15% (or 18% or more) of their salary into a pension?
Well, no, of course not.
18% might be the just the right amount for a small number of people with particular circumstances.
But it’s a useless guide for everyone else.
Some older people – who’ve left their retirement saving very late – might need to save a lot more than that. And the alternative for some will be to carry on working – to a ripe old age.
On the other hand, as we’ll see below – a lot of younger people might not need to save nearly as much as that – to achieve their financial goals.
So, like most complex questions, the answer to the ‘cost of a pension’ question, depends completely on your situation.
And ‘One Size’ most certainly does NOT fit all.
Here’s the key point to understand about pension (or any kind of financial) planning
There is no Newspaper, or Online Blog in the world that can tell you how much YOU need to save for your own particular goal whether it’s retirement or anything else.
And yes, that includes this blog too 🙂
The only possible exception to this rule is if:
- You subsequently talk to the writer and they’re qualified (and capable) of doing some pension calculations for you. (Clearly, most journalists are not) and
- You’ve supplied them with all your personal financial details and objectives. And you’ve supplied outline financial background to your wider family too – as that could be relevant.
Unless you do that then no one can work out your numbers for you.
And I assume that you don’t share those details with Journalists or bloggers.
So let’s stop pretending that they have the answers to this most thorny question.
Personal financial life planning is . . . well, PERSONAL – as we saw here
That said, if want to learn HOW to work these numbers out for yourself – I can help.
You do NOT need to tell me anything about your finances either – this is just education around a planning process – pure and simple.
You can contact me here for help on that.
Or to learn when I’m holding the next group workshop on these lessons – just sign up to my newsletter now.
Now for the silliest story I’ve seen on pensions
And this one – sorry guys – appeared in the Financial Times (12 February 2016) under the headline of:
Why millennials go on holiday instead of saving for a pension.
The article went on to say:
Today’s 25-year-olds need to save the equivalent of £800 a month over the next 40 years to retire at 65 with an income of £30,000 a year . . .
Now, just in case you read that too quickly . . . let me spell out the key points in that simple statement:
- Today’s 25-year-olds
- Need to save . . .
- Eight hundred pounds
- Per month – each and every month
- For a 40 year working life
- Just to get a pension of £30k p.a.
Wow . . . Really?
What planet were they on?
Well, I think they were on planet ‘shock horror story’
And, if I’m right about that – then they were very successful with it – because that article went ‘viral’ . . .
. . . and, I can assure you that ‘going viral’ is a rare event for an FT article – especially one on pensions.
But it’s not so surprising given its shocking (£800 per month cost) content eh?
So the FT ran another story (the following week) congratulating themselves on the interest they’d generated with their ‘shock’ story.
They even displayed some of their funniest Twitter reactions.
This one was my favourite – very funny 🙂
because it proves how these ‘shocking’ pension articles put people off doing what they need to – which is to save for their later years.
So what’s to be done about all this?
Well I did offer the FT my services at the time – to write a more balanced article on the true cost of a pension.
But I’m still waiting to hear back on that 😉
So, in the meantime
Here’s a new headline for any upset 25-year-olds
Your personal net starting cost to fund that modest pension could be as low as £192 per month (that’s just £6.32 per day) *
Or if you’re employed (Vs self employed) and your employer is matching your contribution to pension then . . .
. . . your starting cost might be as little as £96 per month *
And that’s nearly 90% less than the FT’s £800 headline.
* Please see warnings at base of page
Or, to put it another way, it’s about the same price as a coffee each day.
Or, to put that another way, your total gross cost could be less than 6% of a £50,000 annual earnings.
So with only a basic DC pension scheme with your employer you could very well build a tidy pension if you join up whilst you’re YOUNG and keep your savings going.
Indeed, your personal contribution could be less than 3% or your gross earnings if your employer pays half.
Now, the FT example was for a high target pension of £30,000 p.a. and that might not be affordable – even on my more sensible assumptions – if you’re not earning my example figure of £50,000 p.a. just yet.
So, let’s say you earn half that sum – and you’re happy to target half that pension – at least for now.
Well, in that case, your personal starting cost could still be around 3% or less of your gross earnings if your employer pays half.
How much more interesting (or shocking) is that?
Does it really do ANY good whatsoever to ‘bend’ the numbers so that you can publish a story about how pensions are absurdly unaffordable?
This Insight shows that for the young, far from pensions being an impossible dream – they’re very much within their reach.
The challenge is much bigger for those in their 40s and 50s with very little saved so far – but that’s a story for another day.
And, whatever your situation, it’s important to understand that the amount you NEED to save – to hit a target pension income -a long way into the future – depends on the assumptions you make – about a lot of variable factors.
We’ll explore these in detail at another time. For now – there’s a short summary of the assumptions used in this Insight – at the base of this page.
What you need to know is that the true cost of a pension for you personally may be a bit higher or lower than the numbers we’ve looked at here.
Long term financial life planning is not an exact science
So, you need to keep on top of your planning throughout your life.
And you need to steer clear of the nonsense that’s written about it too – because there’s plenty of that out there.
So be very selective about what you read – and who you follow 😉
And take good care out there
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Warnings about the numbers on this page
Assumptions used in my example pension costs.
Single Tier State pension taken into account at an assumed retirement age of 68.
The gap between age 65 and 68 is funded under this plan.
Investment growth of 4.6% p.a. ‘real’ (after inflation) based on 5.1% p.a real long term return on equities less a 0.5% p.a. total charge for a low cost employer sponsored DC pension scheme.
A level annuity is taken at retirement to provide a 7.3% p.a. starting income.
(this rate is estimated from Government Actuary Department GAD tables and is based on more normal medium term gilt yields of 5% p.a.)
The target starting pension income takes account of inflation up to the point of retirement but then assumes a non inflation linked pension after that point.
This is in line with the reality of what goes on in the pensions annuity market place.
Apparently there are more Bentley cars sold each year in the UK than Inflation linked annuities.
That’s why I have a Rolls Royce Cartoon on this story 🙂
Virtually no one buys inflation linked annuities because they can’t afford them.
So why would we put people off saving at all by pretending that they’re aiming to buy one?
Ford Mondeos might not offer quite the same comfort as a Bentley or Rolls Royce over the long term.
But they will get you from A to B for a good while under most normal conditions.