The true cost of a pension
Could be a lot less than the experts will tell you
So what is the true cost of a pension?
It sounds like a simple question doesn’t it?
But it’s seemingly impossible for some financial journalists to get to the bottom of it – as I summarised in this video
So, let’s see how the Press and others might mislead us about pensions …
… and ask if this might be one reason why some people don’t bother saving anything at all 🙁
This is a BIG issue – and affects millions of people
So, if this is useful to you – or could help a friend or family member – please hit a share button on this page.
I honestly believe they’ll thank you for it 🙂
Now, I’ve observed the Pensions and Investment industry (from the inside and out) for more than 30 years now … and, sadly, there aren’t many in the media who can help you to navigate it.
Sure, there are lots of journalists who can grab people’s attention with a ‘scary’ headline … or engage them with a good story.
And they even have a formula for doing just that.
What makes a strong news story?
Perhaps you’ve noticed … that the stories in the papers (or leading online journals – or mainstream TV) normally have one or more of these characteristics:
- They involve some ‘conflict’ (between good and evil) So, on financial stories that could be a bank or insurance company or even the government as the oppressor.
- They have a strong ‘human’ element – for example about Jenny and Phil and their 3 ‘lovely children’ from Weston Super Mare! … or
- They’re about something ‘Odd’ or curious. So, for example, “Man bites dog” is much more newsworthy than the normal stuff 🙂
The media obviously avoid ‘boring’ stories because they don’t sell papers/produce ‘clicks’/or drive viewer numbers.
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 really 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 I think it can help to contrast these solid ideas with what you’ll probably see quite often in the mainstream press.
The typical silly pensions story in the press
And, to be clear, these are just 2 of many examples of this story – 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.
So please take their stories with a ‘pinch of salt’ 🙂
Shocking is Newsworthy!
Can you imagine seeing this headline?
John Smith saves steadily over many years – for a decent pension
No, nor can I.
We’re not going to see that one – because it’s a useless headline or News story …
… it’s just a boringly good outcome for John!
So, you will NOT find that story in the press.
You’re left to decipher the facts from the fantasy in the scary stories.
There are of course some reliable sources on pension and investment planning matters.
And you can get updates from this one – by signing up to my 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 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 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.
The KEY point about pension (or any kind of money) planning is this
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 your personal financial details with Journalists or bloggers.
So please, please, please …
… 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 you have a group of people (employees or friends) and would like them to learn HOW to work these numbers out for themselves – I can help.
You do NOT need to tell me anything about your finances, this is just education around a planning process – pure and simple.
And you can contact me here for help with that.
Or just sign up to my newsletter for updates and more ideas
Now for the silliest story, I’ve seen on pensions
And this one – sorry guys – appeared in one of my preferred papers (the Financial Times) on 12 February 2016.
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’re as shocked as I was, when I read that simple statement … let’s read it again and spell out the key points:
- 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?
When I saw that, I frankly wondered what planet the FT was on!
But then I remembered … they too, sometimes spend a bit of time on planet ‘shock horror story’
Now, from their perspective, they were successful, because that article went ‘viral’ …
… and ‘going viral’ is very rare event for an FT article – especially one on pensions 😉
That said, it’s hardly surprising that it went ‘viral’ with that shocking (£800 p.m. cost) guidance is it?
What astonished me was that to build on their “success”, the FT ran another story (the following week) congratulating themselves on the interest they’d generated with this ‘shock’ story.
And in that follow up they showed some of their funniest Twitter reactions.
This was my favourite. Funny, don’t you think 🙂
So what’s to be done about this?
Well, I offered the FT my services at the time – to write a more balanced article on the true cost of a pension – but as of today … I’m still waiting to hear back on that 😉
So, in the meantime
Here’s what 25-year-olds should know on pension costs
Your starting personal net cost to fund that modest pension could be as low as £192 per month … or just £6.32 per day.
But please see assumptions and warnings at the base of this page
If you’re employed (as compared to being self-employed) and your employer is matching your contribution to pension then … your starting cost might be as little as £96 per month *
That’s nearly 90% less than the FT’s £800 headline.
Or, to put that another way, it’s the same cost as a coffee each day.
Or, to look at it yet another way …
… your total gross cost (before tax relief) could be less than 6% of a £50,000 salary …
… or less than 3% if your employer pays half.
Of course, this 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.
But if you earn half that amount (and you’re happy to target half that pension – at least for now) your personal starting cost could still be around 3% or less of your gross earnings – provided that your employer pays half.
Now, how much more interesting (or shocking) is that?
In defence of the journalists
Now, you might wonder why journalists publish stories so very often – about how pensions are absurdly unaffordable?
And whilst they certainly do like a good ‘shocking’ story … it’s not just for that reason.
You see, the journalists get their silly numbers from cautious advisers. And it’s these advisers who, understandably, don’t want to be accused (by the regulator) of:
- Being too optimistic about investment returns or
- Assuming that savers might use their pension funds to buy a fixed pension income (vs an inflation proofed one) … despite the fact that ‘fixed’ incomes are precisely what most people buy.
They assume that everyone saving for a pension is going to want a Rolls Royce version and kinda forget the fact that most people can’t afford that kind of car!
The bottom lines
The true cost of a modest pension (for YOU personally – and on top of the state pension) may be a bit higher or lower than the example numbers we’ve looked at here.
But, in broad terms, the cost (for the young) to fund a modest pension is NOT an impossible dream. It’s actually quite achievable for most.
The challenge gets much bigger if you reach your 40s and 50s without any savings …
… and people in that situation can easily be tempted to take big risks with their money – in an attempt to catch up with those taking the gentle savings approach.
(note the climbers in this image. Their late climb plan might work – if they’re lucky!)
And, whatever your situation, remember that the amount you need to save – to hit your personal target pension income, a long way into the future, will vary a great deal on the assumptions you make – about a lot of variable factors – which we’ll explore in detail another time.
For now, you can get clues from the assumptions used in this Insight – at the base of this page.
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 please be very selective about what you read …
… and who you follow 😉
And take good care out there
Please share your thoughts in the comments below. You can log in with your social media or DISQUS account OR
To “post as a guest” – just add your name and that option will pop up.
For more ideas that connect both money and life
Join my Facebook group here
Or sign up for my newsletter
With which you can also have my ‘5 Steps for planning your Financial Freedom’
and the first chapter of my book, ‘Who misleads you about money?’
All free of course 🙂
Warnings about the numbers on this page
Assumptions used in my example pension costs.
Single Tier State pension is 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.