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Pension saving for some will be a challenge, as it involves putting away a sum of money in the present in order to benefit in the future. However, with the full State Pension currently sitting at £175.20, the sum is increasingly viewed as a safety net to the savings a person makes for themselves. In this vein, understanding pension contributions and the arrangements one has in place are likely to be more important than one may perhaps think on a surface level.
Express.co.uk spoke to James Norton, Senior Investment Planner at popular investment platform, Vanguard, who provided insight into pension saving.
Mr Norton outlined the cost arrangements Britons often enter into, and how choice is vital.
He said: “If someone retires at 60 or 65 with a pension, then they could be drawing on that sum for another 30 years depending on how long they live – the average life expectancy in the UK is currently at around 81.
“A person’s time horizon is therefore very long, and so it is important to not only think about costs on the way up – like accumulating money – but also costs on the way down.
“Costs are an important factor for all pension savers to consider, and they can make a real difference.”
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But to understand the true difference cost arrangements can make, Mr Norton drew upon an example.
Clearly setting this out, he examined how retirement can be significantly impacted by the options a person chooses in the present.
He explained: “For example, if someone has a pension fund of £350,000 – although that sounds huge it is the equivalent of saving £250 regularly from age 20 to 60.
“Assume this individual retires at 60 and they want an income of £20,000 from that pension.
“Then assume the money will stay invested and make a long term return of five percent a year – great.”
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However, Mr Norton explained the factor of cost becomes particularly important at this point.
Some may enter into a high-cost arrangement, perhaps even without their knowledge, which sits at an average of two percent.
This may be the case for those with a fund manager, or individuals who have an expensive fund, and will thus provide a return of three percent when costs are taken into account.
But alternatively, some saving towards their retirement could be on a low-cost arrangement, which, for example at Vanguard sits at 0.37 percent.
Mr Norton explained further: “For the high cost investor taking out £20,000 a year, funds will run out after 24 years.
“These individuals will have done well, taking out £480,000, but for the low cost investor, paying less in fees, the money actually lasts another eight years – a big difference.
“Someone on a low cost model wouldn’t run out of money until they were to reach 92 years of age.
“At 32 years, taking out £20,000 a year, this individual would have taken out over £640,000 from their pension.
“That’s a difference of £160,000. Those amounts of money can actually be life-changing.”
While Mr Norton acknowledged it would never be possible to predict how long one was going to live, the benefits of a low-cost arrangement are undeniable.
Having more funds at one’s disposal means a person can create a flexible retirement and have more for their goals.
It may be the case some could choose to take out more money while they are feeling fit and healthy if they so desire.
But a larger pot could also mean an individual has more to leave behind when they eventually pass away to loved ones, or favoured charities.
Regardless of the steps one chooses to take with their pot in later life, building up enough money for these options to be available is clearly key.
While it will involve a measured and considered approach, it is likely to produce a favourable outcome for retirement savings.
Mr Norton concluded: “The difference in outcomes between high cost and low cost is extraordinary.
“Bear in mind that your savings are your hard-earned money, built up over the course of your lifetime.
“For this reason, consider taking action. Don’t let other people get rich off the back of your hard work.
“This really is a small change and moving to a low cost provider has a massive difference, year after year after year.”
Do you have a money dilemma which you’d like a financial expert’s opinion on? If you would like to ask one of our finance experts a question, please email your query to [email protected].
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