Mind the income gap

We often hear about growing income gaps in our society. But there is one particular income gap that is not talked about quite so much – the income gap between you and your future self. The word pension is, at best, viewed as boring and, at worst, viewed with suspicion and negativity.

Speaking recently at the NOW: Pensions’ Employer Forum, I explained that I prefer to think about my pension as a replacement income for the period when I decide I want to stop working full time. Building up a replacement income should be straightforward. It should be a utility that works seamlessly without forcing us to become specialists – pretty much like having water and electricity in our homes.

I think that this is often seen as complicated because pension experts use very technical language, talking about different investment strategies and attitudes to risk. Most of us have a fulltime job, so when getting home we don’t want a second job as our own personal investment banker. In addition, it is difficult to outperform the investment portfolios that are already offered as a default in auto enrolment. Instead, we should direct our attention and energy to the big decisions that really make a difference for our future selves.

Let’s get practical. Jane is 32 years young and lives in the East Midlands. She works as an office manager and earns £29,000 per year, which is close to national average for women of her age. The current maximum replacement income provided by the government at State Pension age is £8,546, about one third of her current income. This is roughly what she could expect if she decided to opt-out of auto enrolment. But if Jane stays auto enrolled, she will save 8% of her qualifying income over the next 40 years. Her total replacement income will then be almost two thirds of her current income. Auto enrolment significantly reduces her income gap with her future self.

Is the remaining income gap a problem for Jane? That depends on the lifestyle that Jane wants later in life, whether she is home owner and has access to other savings. It is not the size of Jane’s income that will determine if she will feel wealthy later in life, it is the size of her future expenses. If Jane thinks the gap is too big, she can reduce it further by working part-time beyond the State Pension age and/or signing up today to pay more in each month.

Your pension savings should be a basic utility that does not require you to micro manage it. My personal suggestions are:

1. Don’t opt out, stay auto enrolled
2. Start saving early in life
3. Don’t worry about investments, the default is great.

When your life situation changes, for example getting a new job, buying a house or having children, you should put some time aside and think about your future self. Focus on the decisions that matter, for you today and for your future self – because both of you are worth it!

Stefan Lundbergh, Director, Cardano Insights

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