• T C Boles
  • September 25 2020

How much do you need to have a comfortable retirement?

How difficult is it to save enough for retirement in the private sector? The answer is horrifyingly misunderstood by most workers. Looking at the figures “in today’s money” gives some stark and worrying conclusions. The key figure used in these calculations is the 15 year UK gilt yield which stood at 1.61% 12 months ago and yet at the time of writing sits at 1.34%. This has significant ramifications for pensioners, savers and public sector workers in ways that are often not clearly understood.

The basic State pension for most under 40 year olds will be £170 per week under the new single tier pension arrangement at the age of 65. This equates to £8,840 per annum in today’s money. Isle of Man Treasury have advised that the State Pension should only be treated as part of retirement planning.

Many think the National minimum Living wage - currently £7.38 an hour or £14,200 pa (gross) @37 hour week is not very much but you would still need to save approx £80,000 into a pension to generate this in retirement each year, and that’s only when combined with the state pension of £8,840 pa after you reach 65 years of age. If the idea of living on the national minimum living wage doesn’t appeal, then a retirement spent on the average wage will be more attractive. The average salary in the UK is currently £29,500 and you may be shocked at just how much you would need to save in order to generate an income of the average salary even when combined with the State pension. A saver would need to have put away £300,000 over their lifetime in order to generate a pension income of around £21,000 a year from age 65. Added to the state pension and the total will amount to the average UK wage.

In order to achieve this a 20-year-old would need to have saved £3,000 a year into a pension, a 30-year-old would need to have saved £4,500 a year, and a 50-year-old would need to save over £10,000 each year. These figures sent a ‘stark’ message to savers, who should reassess just how much they are putting aside for retirement. If savers want to enjoy a pension above the minimum wage, they need to start early and contribute regularly. The situation is dire with many hard working families heading inexorably towards a miserable retirement. We don’t advocate compulsory enrolment for businesses with fewer than 10 employees but we believe that responsible Isle of Man employers should consider setting up a scheme for their employees.

The situation is dire with many hardworking families heading inexorably towards a miserable retirement

At the other end of the scale the same reductions in interest rates that have made it harder for working people to save for retirement has handed an unexpected windfall to those with Defined Benefit (final salary) schemes. These pensions are guaranteed and the reduced annuity rates have made them more expensive to maintain for the Companies making the guarantees, and some are keen to divest themselves of these long term liabilities by offering generous terms for transfers. A man who could expect to retire at age 60 with a guaranteed pension of around £25,000 pa can expect a pension transfer figure of around £1,000,000! Some lucky individuals have worked steadily away for a long period of time to find that they have been offered cash transfers exceeding even the UK lifetime allowance (“LTA”) of £1,000,000. For these fortunate individuals it may be extremely fruitful to take advantage of the various Enhanced Protections that HMRC allow for offshore workers with UK pensions that are in excess of the LTA and get their schemes moved to the Isle of Man without delay.

There is another fundamental reason why you should move your scheme here if you are resident on The Isle of Man; when the time comes to commence drawdown your tax free lump sum of 25% will be tax free when it leaves the UK but it may be taxed when it arrives in your hands here on the Isle of Man. You also miss out on a permissible 30% tax free lump sum for Isle of Man Schemes where you have been living ex UK for 10 years or more.

Finally it is a matter requiring further study that the methodology behind the calculations made to determine the public sector pension deficit has seriously and deleteriously affected the headline £3bn Public Sector Pension Deficit carried by all tax residents here on the Isle of Man. There are solutions that are available to improve this methodology.