Bless its little cotton socks. What that new baby really needs for a christening present is a time travel ticket back to 1984, so that it can start saving properly for the pension it’ll need at age 65.
Or so says pension provider Liberty SIPP, which has just released a rather startling little document that calculates the likely shortfall in pension provision for a baby born today. Low portfolio growth rates, terrible yields and increasing human longevity have ganged up on humanity in a rather unfortunate way, it seems. Yes, someone born in 2014 would need to have started saving in 1984 – the year Ghostbusters hit the big screen – to retire at 65 with a pension income worth half the average salary (£27,000).
To be honest it’s a bit hard to know exactly what lessons we can draw from the exercise, apart from making sure that everybody does their best not to make the situation worse than it already is. And, perhaps, to give today’s grandparents another nudge about the fact that they’ll probably need to pass some of their wealth on to the young ‘uns if hardship is to be avoided.
But heck, here’s what Liberty has to say on the subject. You check the maths, and let’s see whether we agree:
To secure an annual income of £13,500 at age 65 – after taking the 25% tax-free lump sum – currently requires a pension pot of £250,000. A person saving at the “average rate” – i.e making only the contributions required to generate the average UK pension pot size of £30,000** by age 65 – would need to save for 95 years to reach the £250,000 mark.
This means that a baby born in 2014 would need to have started making pension contributions (or someone else have started contributing on their behalf) in 1984 — the year Band Aid topped the charts – to be able to retire on half the current average wage.
To achieve an annual pension income of £13,500 without taking the tax-free lump sum requires a pot of £188,000. The average person born in 2014 making average contributions would need to have started saving in 1991 in order to build up a pot this size.
The reality is most people are saving nowhere near enough. For a 21-year old to build up a £250,000 pension pot and receive half the average salary when they turn 65 (after the tax-free lump sum), they would need to start contributing £1,734 per year — or 8.3 times more than the current average rate of saving. To achieve the same retirement income without the tax-free lump sum (a pension pot of £188,000), they would need to contribute £1,305 per year — or 6.3 times more than they are currently saving.
“I’m sure the pensions industry is starting to sound like a broken record,” says John Fox, Managing Director at Liberty SIPP. “But…either we do something about this, or we invent a time capsule so that a baby born in 2014 can start saving into a pension in the mid eighties, in order to get a half decent retirement in 65 years’ time.
“Such concerns are unlikely to trouble Prince George when he celebrates his first birthday next week. But his contemporaries – who are only able to save for their retirement at the average rate – are already 31 years late in starting a pension if they want to retire with a retirement income worth half the average Briton’s salary.
“Princes seldom have to worry about their pension plans, but for everyone else this is a real and pressing issue.”