Can personal pensions produce meaningful retirement benefits?
Posted on 03-06-2009 by Philip Mowbray | 0 comments
Given that people saving into the proposed national Pension Accounts scheme may have a contribution level as low as 8%, it is worth looking at what level of retirement income this could potentially generate. Let’s consider the example of a 25 year old male, looking to retire at age 65. Our analysis suggests that if he invested 50% equities and 50% bonds, it would give a retirement income of 27% of his final salary. If joining is delayed to age 40, the replacement rate drops to 14%.
Will this level of income be attractive, and will it be enough to support his lifestyle in retirement? Probably not.
So how do we address this issue? Clearly one solution is to persuade people to save earlier, and then to increase contribution levels. Using the example of a 25 year old male, our analysis shows that if he made a fairly modest increase of 1% per annum for the first 5 years (taking his contribution up to 13%), and if he maintained this level of contribution through to age 65, he would increase his potential retirement income to 42%. This starts to look meaningful.
That’s fine in theory, but how do we get scheme members to sign up to this sort of contribution arrangement, and how do providers and trustees communicate the benefits of this sort of arrangement to members?
More of which later…
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