Higher Savings to
Sort a Pension Deficit
Higher savings to sort a pension deficit
Higher Savings to Sort a Pension Deficit
Ian and Julie Black
Ian is 55 and his wife Julie is 53. Their two children, aged 30 and 27, are both married and each couple has one child. Ian earns £52,000 a year as a safety systems manager at a manufacturing company where he has worked for 10 years, and where he expects to stay until he retires at between age 63 and 65. Julie is a teacher and aims to stop work at 60 when she will qualify for a ‘final salary’ pension of 30% of her earnings, currently £39,000 a year. They have a £90,000 mortgage outstanding on their home, which is worth about £320,000. They have ‘rainy day’ savings of £25,000 and some longer-term investments of £60,000 from their inheritance from Julie’s parents. Ian’s employer’s pension scheme is ‘defined contribution’ and his fund is worth £170,000, and he also has a former employer pension worth £90,000.
Their adviser asks them to work out their current outgoings and then to estimate the level of income they will need when they have both retired. This is not easy since the couple have to (more or less!) agree on how much they plan to spend on holidays, the grandchildren and other things. By then, they will have paid off the mortgage and may decide to move to a smaller house in the same area. They end up agreeing a target level of income and the adviser takes away details of their pension funds for analysis.
The adviser works out that on current rates of contribution to their respective pension schemes, their pension income will just about match their outgoings, but only if Ian waits till age 65 to retire and takes the maximum fixed pension so that their income will be eroded by inflation. But if Ian adds £400 per month to his pension savings, and both Ian and Julie contribute £400 per month to Individual Savings Accounts, Ian will be able to retire at 63 and they can be confident that their retirement income will be at least 10% above their target income level and will have some inflation proofing built in.
The adviser recommends alterations to Ian’s fund selections within his pension schemes, and also that both Ian and Julie transfer the maximum they can within the limits into ISAs each year so that they can draw tax-free income from them during retirement. He recommends a relatively high holding in stockmarket investments initially but recommends reviewing this annually and reducing the stockmarket element, especially in Ian’s pension fund, as retirement date approaches.
The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.