The 30s are a turning point as people’s relationship with money matures, ‘reality hits’, and big life changes such as mortgages, family and children start to compete for income. It’s easy for long-term planning to fall by the wayside, but this is exactly when pensions need to move up the priority list.
As EQ Investors financial planner Zoe Brett put it: “Your 30s is definitely the time to start getting serious about pension planning. Time is still on your side – but by your 40s, it’s already an emergency.”
At this stage, Brett said, people should start looking at all the pension pots they’ve accumulated and sense-checking the basics: Should they be consolidated? Are they performing well? What are the charges?
That sense of urgency often starts when people run the numbers for the first time. According to the latest data by the Pensions and Lifetime Savings Association (PLSA), a single person will need £31,300 a year for a moderate retirement lifestyle – and that rises to £43,100 for a comfortable one. For many, those figures can come as a shock.
Below, we look at the most crucial questions everyone in their 30s should ask themselves to make sure they can maintain their expected lifestyle well beyond their working life.
How much am I contributing?
Brett pointed to the “really good rule of thumb” of contributing half one’s age to their pension – 10% in your 20s, 15% in your 30s and so on.
However, contributing that much can make a massive dent in your income.
“I know I would definitely feel it if somebody took away 15% of my income, so yes, there's that aspect to take into account,” she admitted.
“However, this is a time in your life when you are starting to earn more money, perhaps have some extra resources that you can throw at it. As an incentive, remember that in your 30s, you still have the opportunity to have a relatively leisurely journey into retirement.”
Should I be consolidating?
It’s likely that 30-year olds will have more than one pension pot to their name, one for each of the employers they have had since they started working.
Different pensions will have different benefits, rules and structures, so there is no one-size-fits-all argument. But for 80% of people, consolidating will be the way to go, said Brett.
“Having one pot is more straightforward both for the investor and the adviser – it is much better from an administrative point of view and you can have one, cohesive investment strategy behind it. It also brings charges down,” she said.
Beyond individual preferences, there are broader reasons why someone might want to keep their pensions split. For instance, they may wish to keep one sustainable pension and one conventional one.
Another argument is to reduce risk by spreading money across providers in case one goes under – though Brett was sceptical of this, noting that the risk of default is low and funds are protected by the Financial Services Compensation Scheme (FSCS).
Are my charges fair?
Charges play “a huge role”, said Brett. Workplace pensions usually have low charges because either the employer picks up some of the cost or, alternatively, providers give them discounts for the business they bring in.
Typically with workplace pensions, charges are around 0.5%.
However, there are a lot of products out there with very high charges that are no better or worse than other, perfectly reasonably charged, products. Ultimately, charges eat into profits and growth, so that’s “something to keep an eye on for certain”.
“If your costs are getting over 2.5%, factoring in your product, your investments and your advice, you really need to start looking at the value that that is adding,” she said.
“For a workplace pension, 0.75% would be the upper end.”
Am I taking enough risk?
In your 20s, 30s and even 40s, you can afford to take “a lot more risk”, according to the planner.
“Just take the risk. Don't worry about it. Don't look at it. Don't tear yourself up with the volatility. It's all going to be all right,” she concluded.
Am I on track with my goals?
If behind on their goals, the key thing for people is to not bury their head in the sand, according to Brett.
“When you realise you are behind, you've actually done the hardest part of it –acknowledging and accepting that there is a problem. It's a big mental breakthrough to think: I could go from my working life into absolute poverty,” she said.
“Even if you can only do a small amount, then that's absolutely fine. Just start. You just need to start with something and get some momentum going.”
One thing that might make up for lost time is to start saving more each year with salary increases as one financial planner recently recommended doing on Trustnet.
“These tiny wins and re-budgeting, committing even just £50 or £100 a month, over time, it will add up,” Brett concluded.
For a pension roadmap for people in the 20s, click here.