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Save £800 per month for a reasonable pension
Savers told to save £800 a month for moderate retirement
UK workers need to save £799 a month into their pension to be able to achieve a moderate retirement, research has shown.
The calculations were produced by the Institute and Faculty of Actuaries – using the retirement living standards published earlier this month by the Pensions and Lifetime Savings Association - which concluded savers will need to save well above the automatic enrollment minimum contribution rate to achieve a moderate or comfortable income in retirement.
According to the IFoA, an individual aiming for a minimum income retirement target – a pension of £10,200 per year - should be saving £86 per month, on average, from the start of their working life.
This should be covered by the contribution they and their employer have to make under auto-enrollment.
However, to work towards a moderate level of income of £20,200 a year, the amount of savings required rises, with individuals needing to save £799 a month on average over their entire working life.
This represents about a quarter (26 per cent) of earnings for someone on an average full time salary, according to the IFoA.
Source: maria.espadinha@ft.com of FT Adviser
How much should I pay into my pension?
So how much should I pay into my pension? The first thing to do is re-figure your thinking …your question should be how much should I invest for my future well being for when I am older? A good “ball park” figure would be up to 10 times your average working-life salary by the time you retire. So if your average salary is £30,000 you should aim for a pension pot of around £300,000.
From an actuarial perspective you should save 12.5 percent of your monthly salary. So if your annual salary is £30,000 you would save £312.50 a month – which over 40 years at 4% growth could build a pension pot of over £300,000. But remember with the benefit of tax-relief (at 20%) your net contribution would be £250.00 a month, a little more manageable.
A workplace pension this is even more achievable, if your employer matches your contributions. You would only need to pay in £125 per month (5 percent of your salary) which your employer would double up to £250. Tax relief of 20 per cent then takes this up to the required £312.50.
But how much will I really need?
How much do you need to live comfortably?
For a quick estimate, try the '50-70' rule. This suggests that you should aim for an annual income that is between 50 and 70 percent of your working income. So if you earn £50,000 now, you will want to achieve somewhere between £25,000 and £35,000 a year.
Having said that you may wish to plan in a more detailed way in which case you will need to consider the following:
What is your current monthly expenditure
Deduct any regular costs that may no longer apply after retirement, such as
mortgage repayments (if you expect to have paid off your mortgage by then)
work travel costs
pension contributions
regular savings
Make any additional deductions for reduced housekeeping costs (e.g. if you have children who will no longer live at home). A smaller household can mean lower bills for
food
energy
entertainment
transport
holidays
Think about any other savings you could make, such as
running fewer / cheaper cars
taking holidays at cheaper times
This will give you a new figure for the monthly income on which you could, in theory, live comfortably.
What extra money might I need in retirement?
Some say that retirement is the longest holiday you will ever have so you may wish to consider:
Luxury holidays
Home repairs / improvements
Dental / medical expenses
Vet’s bills (if you have pets)
Helping children financially
Saving for care costs in later life
This might mean a higher income, or just a larger pension pot (this depends on how you choose to take your pension, which we’ll come to in a minute).
But remember that typically the cost of living doubles every 25 years, so work out what it might be by the time you retire (and also by the end of your retirement!).
How long will my retirement be?
The problem most of us share, is that we don’t come with an expiration date attached so we never know how long we are going to be here and how much we need to save but you need an idea of how long your retirement could last. This means estimating:
Your retirement age
How long you will live
A typical retirement age might be 65. You may wish to retire sooner, but you’ll need to factor this into your calculations (as it means less time saving and also more time living off your pension). If you retire later than 65, you may not need to save as much (but will probably be able to save more!).
Lifespan is less easy to guess, but you can get a rough idea (based on your health and lifestyle) using a life expectancy calculator. Broadly, an average 40-year-old today who retires aged 65 could expect to live to 82 – meaning a 17-year retirement. Those who keep fit and have a healthier lifestyle could add 5 to 10 years to this. That’s good news for you, but it does mean you’ll need more savings.
How much state pension will I receive?
If you qualify for the full new state pension, you’ll receive £168.60 per week from your state pension age. This age is currently 65, but for those born after 5 April 1960 it is 66, rising to 67 for anyone born after 5 March 1961.
This works out as an income of £8,767 per year, guaranteed for life. The amount will also increase over time, so will maintain its buying power - and when inflation and/or wage growth is below 2.5 per cent it will actually outgrow both of them, thanks to the 'triple lock'. On its own it’s clearly not enough to live on, but may be vital in helping you achieve a sustainable retirement income from your private pension(s).
Do I have any final salary pensions?
Add this figure to your state pension to keep a running total of your guaranteed income.
Now you can start to work out how much more income you might need from other pension pots.
How big should my pension pot be?
Now you can ask, ‘What size pension pot do I need?’ You should now have the two most important figures to hand:
Your preferred annual income in retirement
Your guaranteed income in retirement
Deduct your guaranteed income from your preferred income to find the amount you’ll need to generate from other sources (e.g. your pension pots).
How much can I pay into my pension?
Up to now we’ve only asked ‘How much should I pay into my pension?’ – but the other big question, especially for higher earners, is how much you’re permitted to pay in.
There is an annual allowance (how much you can pay into your pension each year) and a lifetime allowance (how much you can pay into your pension in your lifetime) that both limit the amount you can save into pensions and still get tax relief.
How much can I pay into my pension if unemployed?
If you earn less than £3,600 you can pay up to £2,880 a year into a personal pension (e.g. a stakeholder pension or a SIPP). This money benefits from tax relief to become £3,600 (and since you’re not actually paying tax, this is exceptionally good value). This is enough to build up a decent-sized pension pot – in 20 years you could have over £100,000, and in 30 you could have over £200,000.
How can I stop my pension from running out?
If you’d rather have the safeguard of a guaranteed income for life, you may prefer to buy an annuity with your pension pot rather than use a drawdown scheme. The advantage of an annuity is that it never runs out. The downside is that the annual income may be lower than with a drawdown scheme.
Am I saving enough into my pension?
The first thing to do is find out how much is in your pension pots now. You may also have old pension pots from previous employment – track these down and ask your adviser about combining them into one pot (‘pension consolidation’).
Your pension provider should be able to give a projection of your expected pension pot at the age of 65 (or whenever you plan to retire). You can also ask a financial adviser to give you an independent forecast.
You can then discuss your retirement income needs with your adviser, who will be able to tell you if your projected pension pot will be large enough to meet them. If not, he or she can recommend an affordable increase in your monthly pension contributions.
Remember: every pension contribution you make benefits from at least 20 per cent tax relief, and if you have a workplace pension your employer also contributes to it – making it the single most efficient way to save money for your future.
The citizens advice bureau
Citizens Advice is a network of 316 independent charities throughout the United Kingdom that give free, confidential information and advice to assist people with money, legal, consumer and other problems….for more read here
Islamic banking and finance
Islamic banking or Islamic finance (Arabic: مصرفية إسلامية) or sharia-compliant finance is banking or financing activity that complies with sharia (Islamic law) and its practical application through the development of Islamic economics. Some of the modes of Islamic banking/finance include Mudarabah (profit-sharing and loss-bearing), Wadiah (safekeeping), Musharaka (joint venture), Murabahah (cost-plus), and Ijara (leasing).
Sharia prohibits riba, or usury, defined as interest paid on all loans of money (although some Muslims dispute whether there is a consensus that interest is equivalent to riba). Investment in businesses that provide goods or services considered contrary to Islamic principles (e.g. pork or alcohol) is also haraam ("sinful and prohibited").
These prohibitions have been applied historically in varying degrees in Muslim countries/communities to prevent un-Islamic practices. In the late 20th century, as part of the revival of Islamic identity, a number of Islamic banks formed to apply these principles to private or semi-private commercial institutions within the Muslim community. Their number and size has grown, so that by 2009, there were over 300 banks and 250 mutual funds around the world complying with Islamic principles, and around $2 trillion was sharia-compliant by 2014 Sharia-compliant financial institutions represented approximately 1% of total world assets concentrated in the Gulf Cooperation Council (GCC) countries, Iran, and Malaysia. Although Islamic banking still makes up only a fraction of the banking assets of Muslims, since its inception it has been growing faster than banking assets as a whole, and is projected to continue to do so.
The industry has been lauded for returning to the path of "divine guidance" in rejecting the "political and economic dominance" of the West, and noted as the "most visible mark" of Islamic revivalism, its most enthusiastic advocates promise "no inflation, no unemployment, no exploitation and no poverty" once it is fully implemented. However, it has also been criticised for failing to develop profit and loss sharing or more ethical modes of investment promised by early promoters, and instead selling banking products that "comply with the formal requirements of Islamic law" but use "ruses and subterfuges to conceal interest", and entail "higher costs, bigger risks" than conventional (ribawi) banks.