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Mind the gap: how to avoid a pension deficit

Every year, there is a day in late summertime when the average state pension runs out. This means that, for the average retired couple, the pension shortfall stands at around four months. In 2021, ‘shortfall day’ came two weeks earlier than it did last year. 

According to research from Just Group, shortfall day fell on August 31st for couples and September 3rd for singles. The yearly average expenditure for a retired two-person household is £28,064. With two state pensions equalling £18,680, this leaves a gap of £9,384 that needs to be made up elsewhere. For single pensioners, the gap stands at £4,502. 

The pension shortfall becomes more complex when you add gender into the equation. On average, women are saving substantially less for retirement and are, therefore, experiencing far greater shortfalls than men. The wider gender pay gap, combined with more instances of part-time work as a result of family commitments, means that single women will hit shortfall day some way before men do. 

The latest figures from the ONS suggest that women earn, on average, 16% less than men. By the time we reach retirement, the pension gap between men and women grows to some 56% – this is no small survey group either, with data being taken from 4 million L&G pension scheme members. Clearly, the pension gap is a problem that (disproportionately) affects both men and women, so how can we address it?

Plugging the gap

To make the up pension deficit, many people will spend their inheritances, downsize their homes, sell off assets or use their investments. Alternatively, many turn to private pensions to make up the difference. 

Since contributions for many employers became mandatory, personal contributions to private pensions have become the norm. For example, in 2020, 88% of eligible employees participated in a workplace pension scheme, according to the Department for Work and Pensions. Compare this figure with the 55% seen at points between 2009 and 2012 and the success of auto-enrolment becomes clear. 

These personal pension pots will make a huge difference for many in retirement, but these kinds of schemes come with some inherent problems. Firstly (and most importantly), many people who auto-enrol lose track of their various pots, or simply don’t engage with the progress of their personal pension until far too late in their careers. 

This only becomes a problem when the scheme you’re paying into is underperforming. After all, when was the last time you checked your pension’s performance? This is why many choose to consolidate their various pension pots (or move their single one) into a transparent, actively managed SIPP

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By transferring to a wealth manager like Moneyfarm, you’ll get a pension portfolio that fits with your long-term goals and your attitude to risk. You’ll have on-hand consultants to help you find the ideal solution and you’ll be able to check your portfolio’s progress in just a couple of clicks. With visibility and performance so important over the long run, it really is never too early to consider switching your pension. 

Some rules of thumb to remember

When saving for the long-term, there are a few general rules of thumb to remember – these are particularly pertinent when planning for retirement. These are:

Start early

The biggest asset any investor can have is time. The earlier you start actively planning your retirement finances, the more time they’ll have to grow and for things like compound interest to make an impact. The interest you could generate over the next, say, five years could grow exponentially over the coming decades. 

Invest regularly

Compound interest, coupled with regular top-ups, can be a powerful combination. When investing over the long-term, make small and regular contributions goes a long way. Not only will you take advantage of what’s known as pound cost averaging, but you’ll be able to invest consistently in a way that’s comfortable for your financial situation. 

Pay off any existing debts

This is a matter of financial responsibility as well as long-term planning. Before you invest in financial markets, it’s important to pay off any existing debts you may have and to ensure that you have enough cash saved for a rainy day. Doing this will put you in the ideal position to start building a long-term investment portfolio. 

Take advantage of professional help

The world of investing has changed. Savers no longer have to go it alone when entering the markets, nor do they have to pay extortionate management fees to have a professional invest on their behalf. With Moneyfarm’s hybrid model, for example, you get all the convenience of a robo-advisor with all the assurances of human expertise. 

Of course, the pension deficit is a wider issue than personal finance. Individual investors can, however, give themselves the best chance of a comfortable and rewarding retirement by planning ahead. If you want to explore how a SIPP could benefit you in the long run, feel free to get in touch with a member of our investment consultancy team. They’ll be happy to run you through your options and help you switch. 

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