The wrong kind of savings

05 Nov 2018

coinsSaving for a pension is the equivalent of St Augustine’s plea

Saving for your pension is comparable to St Augustine’s plea - “Lord, make me chaste, but not yet”. We have every intention to save for the future however it is so far away that we put it off until a later date.

We all know that we have to save for the future, but with low interest rates and improved longevity, do we realise that a much larger pension pot is required to generate a given retirement? The average British 30-year-old in 2000, having the advantage of a defined benefit (DB) scheme, would have expected a pension contribution of 12 percent of wages to generate a retirement income of 67 percent of their final salary. A 30-year-old today, now providing their own pension in a defined contribution (DC) scheme, should expect an income worth just 39 percent. The greater cost of providing a pension is why companies stopped providing defined benefit (DB) schemes and switched the encumbrance to employees. But at 30 years of age, it is understandable to not see the distant danger of not saving enough due to the reward being so far away.

Most humans have a problem with deferred gratification. A famous test for children offered them a single marshmallow up front or two if they waited; only 30% had the necessary self-control to delay. Pension saving is even more of a test of patience; workers have to wait 40 years or more for the pay off. Their pension pot may not even be worth the sum total of their contributions; they may have swapped marshmallows for gruel. This may be why people enjoy the immediate with their marshmallow, instead of planning and saving for gruel.

What would happen, though, if people looked at a pension in positive light? Retirement’s essentially five hundred two-week holidays back-to-back. The average Brit is said to spend as much time researching, saving and planning a holiday as they do enjoying it. However, according to an AVIVA survey, “the British public would rather hoover than review their pension.”

People need to change their attitude to pensions. They should think about what they want in retirement: is it traveling around the world, buying a holiday house in the Maldives, or simply wanting a comfortable retirement? If you start saving early enough, a pension becomes affordable and all of these possibilities can become reality.

However disputed Albert Einstein’s quote ‘’compound interest is the 8th wonder of the world’’ is, it is still a good motto to remember. If a person started a pension for their 3-year-old, assuming a return of 4 percent a year, the sum would double in 18 years, quadruple in 36 years and rise eightfold in 54 years.

If you need another way of visualizing retirement, deVere has put a document together called “making the most of your retirement”, which drives you to think about retirement by comparing the different lifestyles a State pension would give you compared with a well-invested, private pension. It drives the message home and makes you realise the time and attention needed to build your pension pot.

If you are interested in finding out more about your pension, contact a deVere France financial advisor. We do more by removing all the jargon and making communication simple and convenient for you, giving you a greater chance of getting that mega pension pot.

Remember it is never too early to start saving for life’s longest holiday!