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Business and Finance

Money for old folk

Merryn Somerset Webb
Living longer might seem like a good thing - but how are we going to pay for it? It's time to think about pensions

Here’s some rather amazing news: there has been a fivefold rise in centenarians in England and Wales over the past 30 years. In 1981 there were 2,420. Now, there are well over 12,000 and some 600 of those are over 105 (this lot get a card from the Queen every year). The over-90s are doing pretty well too; there are 465,000 of them, up from 157,000 in 1981.

I find this rather thrilling. A couple of decades ago I would have been considered almost middle-aged. But my doctor now tells me he doesn’t consider people to be hitting middle age until they are in their 50s. Thanks to everyone else getting old, I’m still considered young. I like that. But there is a problem with having a very long life. How are you going to pay for it?

Most of us try not to think about this bit. We figure if we keep our heads down, pay off our mortgages and try not to run up too much credit card debt we will muddle through. Good news, then, that the government has been thinking about it for you.

Paying it forward

Last year the UK started to auto-enrol people into pensions. If you work at a large company you should have already found that you have been opted into a new corporate pension scheme (you are paying in 1% of your salary and your company is paying in another 2%). And if you work at a mid-size or smaller company you’ll get your chance over the next few years. By 2018 – assuming you don’t opt out – a total of 8% of your salary will be ending up in a pension fund.

This sounds pretty good. So much so that you might be beginning to feel rather relaxed. If you save that much over every year of your working career what can possibly go wrong? Here’s the bad news: a lot.

Taking account of your savings

The thing is that 8% of a salary saved just isn’t enough to last the full length of a modern retirement. Let’s say you make the UK average salary of £25,000 and save 8% a year. You will end up with enough money to buy an annuity (a stream of income) worth not much more than £220 a month in today’s money. That’s not going to leave enough disposable income for a stamp on your thank-you note to the Queen every year, let alone pay for the things that make old age comfortable.

Usually when the government joins forces with the financial industry to urge us all to do anything, I strongly recommend you ignore them completely. But on the issue of saving for the future I am with them all the way.

You need to save on average a lot more than 8% of your income. It doesn’t have to go into a pension (and given the constant changes made to pension tax breaks, maybe it shouldn’t). But it does need to be saved somewhere.

Merryn Somerset Webb is the editor of Moneyweek. Follow her on Twitter @merrynsw



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