Research carried out recently by Scottish Widows looked at ways to increase pension engagement among the under 30s. The report suggested that encouraging young people to think of pensions as investments rather than savings could increase their retirement fund by a third.
It’s a simple word change that could have massive benefits for your clients.
It has to do with behavioural psychology, or more specifically, ‘nudge theory’, and positive reinforcement. As humans, we view the connotations of ‘investing’ as more positive than those of ‘saving.’
The report also recommended that clients focus on their future self and investing in that future. Doing so could see retirement pots increase by more than £140,000 for those under 30.
A few small behavioural nudges could make a huge difference to your client’s income in retirement. But there are other simple steps they can take too.
1. It’s important to start early
Whether your clients think of their contributions as savings or investments, the study focused on under 30s, and it’s here that the biggest benefits could be found.
An oft-quoted rule of thumb gives a good indication of the amount your clients should be contributing to their pension: Halve the age at which you start contributing and put aside that percentage of your salary each month.
For example, a client starting to pay into a pension aged 30 should contribute 15% of their pre-tax salary. Start contributing aged 50, and a quarter of your clients’ earnings will need to go into their pension to provide a sufficient income in retirement.
A 2020 report by consumer advice group Which? looked to calculate the average spending of retired households in the UK. It found that a comfortable retirement cost around £25,000 per year. A luxurious retirement (including a new car every five years and overseas holidays) cost an average of £40,000.
Starting pension contributions as early as possible gives your clients the best chance of living the retirement lifestyle they want.
2. Maximise workplace contributions
Introduced in 2012, auto-enrolment now has more than 10 million scheme members. As a way to encourage employees to save for their retirement, it has been a huge success. But it would be wrong for your clients to think that they can rely solely on their workplace pension to fund their retirement.
Even factoring in the State Pension (£9,110.40 for the 2020/21 year), your clients’ 8% auto-enrolment contribution is likely to see them fall short of the £25,000 per year mark in retirement.
Upping an auto-enrolment contribution is a great way to start bridging the gap.
Under current auto-enrolment rules, the minimum monthly contribution is 8%. The employee pays 5% and the employer adds a further 3%. Some employers though, will up their contribution when an employee raises theirs.
Your clients should look to increase their contribution if they can, but also check what effect this has on their employer’s contributions.
3. Paying future selves first
Your clients will no doubt have household budgets based on current income and expenditure. A great way to save more – and to build towards a more comfortable retirement – is to pay pension contributions first, and budget with the money that remains.
Money that goes towards regular expenses (a loan or a child’s school fees, for example) can be redirected to a pension as soon as the loan is paid off or a child leaves full-time education. Because the money has been allocated elsewhere previously, it will not be missed, but it could still make a massive difference to your clients’ pension fund at retirement.
So too a sudden windfall or inheritance, or even a pay rise. Your client will not miss the money in the short term, but it could make a huge difference in the future.
Speak to an adviser
Although the Scottish Widows report focused on the under 30s, saving enough for retirement is something that all your clients should be thinking about, regardless of their age. Speaking to a financial adviser has real and tangible benefits.
A recent Royal London report looked to quantify the value of financial advice and found that those clients taking advice were, on average, £47,000 better off at the end of the ten-year study.
Speaking to your clients helps us to understand their circumstances. In turn, knowing their financial position and aspirations helps us put a long-term plan in place to make those goals achievable.
From simple budgeting to reviewing pensions and investment portfolios, we can help your clients regain control of their finances, have confidence in a stable financial future, and give them peace of mind.
Get in touch
If you have clients that would benefit from help in understanding the value of their current pension contributions and any gaps they might have, please get in touch with us. Email firstname.lastname@example.org or call 0116 2407070.
The value of investments can go down as well as up and could mean the full amount invested is not received back. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator
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