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The truth about pensions maths


By Peter Temple


Studies after studies suggest that Black people are at higher risk of pension poverty than any other ethnic group.


We are always told to start saving into a pension plan early in order to build up a decent pool of savings to finance our retirement years. But how do you work out how much is enough to fund your retirement, and therefore how much you need to put aside each month?


Most Black people have little idea of what kind of sum could provide a comfortable lifestyle when they stop working. In order to get a better perspective on what they might need, let's start with a look at some of the factors influencing the kind of retirement we can expect.


These days, when we think about retirement we are contemplating a very different proposition from that of a few decades ago. Several major factors have played a part in this change.


Longer life spans

Firstly, we are living longer. According to the Government Actuary's Department, a man retiring aged 65 in 1981 could expect to live another 14 years on average, whereas in 2005 he has 19 years to go. A woman aged 65 in 1981 had 18 years ahead, compared with 21.9 years in 2005. And that trend continues: by 2025, life expectancy at age 65 will be 20.6 years for men and 23.3 years for women. Most people can expect to be reasonably healthy and active for a good chunk of that time.


Greater wealth

Second, as a nation we are more affluent now than we were in the past. The Pensioners' Income Series 2003/4 shows that pensioners' net income rose by 64% in real terms (ie allowing for inflation) between 1979 and 1997, getting on for twice the rise in average earnings across the economy as a whole.


Some people have investments, savings and equity in their homes, as well as having the state pension and a company or personal pension. They also have greater expectations for their leisure years: travel, new pastimes, a move overseas etc.


Working longer

Thirdly, the Pension Act 2004 introduced measures to allow and encourage people to choose to work for longer, which will include a lump sum of up to £30,000 for people who opt for a deferred state pension (more information is available at www.thepensionservice.gov.uk/approachingretirement/ )



As we now live longer, we need to save more to avoid poverty in our twilight years (Pic: BBC)


How much to save

How much you need to save for retirement will depend on various factors, including: the amount of state pension for which you are eligible.


Whether or not you continue to work into retirement, generating additional income through a part time job or even a new business. This could be received alongside your state pension, or you might defer your pension for up to five years.


How large a pension pot your savings will produce. Projections on investment returns were significantly higher a decade ago than they are now, so pension savers must now put more away to achieve the same end result.


The impact of inflation: Some forms of retirement saving are index-linked and will therefore increase in line with inflation, but others are not, and you will therefore need to save enough to compensate for the effects of rising prices over time.


Inflation has been stable at a low level, around 2-3%, for a decade and more, but there is no guarantee it will continue that way if you are looking at a 30-year working life period.


The age at which you started saving also matter. The earlier you start, the longer you have to make regular contributions, but also the greater the effects of compounding.


Later living costs

It is therefore useful to take a closer look at your likely living costs once you retire. Typically, expenditure in retired households is considerably less than in working homes: the Family Survey 2003/4 shows average weekly expenditure of £458 for households with a working age 'head', compared with £236 for retired households. (However, expenditure falls with age: households aged over 75 spend over £100 less per week than those aged 65-75.)


This fall in outgoings is partly because by the time you retire, the chances are that you will have paid off your mortgage, the children will have left home and probably finished university, and you will not have work-related expenses such as commuter costs.


On the other hand, some costs, for instance holiday expenses, leisure activities and health-related costs, are likely to increase after you retire.


Calculate current expenses

If you want to get a clearer idea of what you might get through if you maintained your present standard of living, calculate your current expenses per year, including the following:


Daily living costs (food shopping, household basics, papers, pet costs, clothes and shoes, small household items, gardening).


Transport (car owning and running costs, fares for train/bus/coach)

Home-related costs (mortgage or rent, repairs/decoration, council tax, utilities, cleaners) .


Health-related costs (dentist, optician, medical insurance, prescriptions)

Leisure costs (sports, hobbies, cinema/concerts, holidays, second homes, booze and fags).


Savings (for house repairs or car, for later retirement, any loan repayments other than mortgage).


Gifts/care (Christmas and birthday presents, gifts to children and grandchildren, gifts to charity or church, caring for elderly relatives or grown up children).


Miscellaneous expenses

Then try to anticipate how those figures might change (not counting inflation) with the change in lifestyle on retirement. When you have an annual retirement average, divide it by 52 to get a weekly figure. Remember to deduct the state benefits to which you are entitled. If you do not know how much you are due, get a state pensions forecast.


With thanks to Interactive Investors where this piece first appeared


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