|Image credit: 401(K) 2012 | Flickr|
At the time of writing this post, the maximum amount that you can expect to receive as your basic UK State Pension is £107.45 per week. It's calculated according to the the number of years you've paid National Insurance or got National Insurance credits. This means you'll only receive the maximum pension amount if you have at least 30 years' worth of contributions or credits behind you.
I'm lucky in that I pay part of my salary into a good company pension so won't be totally reliant on just the State Pension when I retire. But, I know that other people, for whatever reason, aren't as fortunate. Take my husband for example. He's self-employed and, as such, is solely responsible for saving for his retirement. We know that it can be difficult to save for the future when you have bills, a mortgage and various insurance policies to pay; an expensive television licence to buy; food to put on the table; clothes, shoes and toys to buy...I could go on.
Then of course, there's the need to have savings right now, in case an emergency hits. Of course, some people aren't lucky enough to be able to save for a rainy day and their retirement so one normally takes precedence over the other. And when you're facing pressures right now, the 'rainy day' pot normally wins.
So, when I was challenged to compare my average weekly spends with the State Pension, I thought it would be an interesting exercise. But, instead of an interesting exercise, it actually turned into a rather scary one!
There are of course a number of caveats to this pension challenge, which are important to declare:
- I'm assuming that I'll be eligible for the maximum State Pension and have therefore compared my current weekly budget against £107.45. However, I realise that I could be eligible for less money from the State, whilst at the time same receiving funds from a private pension pot.
- When I retire, my household costs will inevitably be less than they are now. My children will (hopefully) no longer be at home, we will have finished our home renovations and we should have paid off our mortgage. We should also become eligible for a winter fuel payment to lessen the burden of winter heating bills, a free television licence and a free bus pass (unless it all becomes means tested at some point). All of these things will mean my husband and I have to pay out for less things, which will reduce the pressure on our finances.
- I have not taken mine or my husband's weekly commuting costs into account because when my husband and I retire we won't be working (duh!). Also, after the age of 60 we should be eligible for a free bus pass, although I'm sure we will continue to own a car.
- The basic State Pension amount will inevitably rise between now and my retirement. The amount typically increases every year so it's fairly safe to say that when I retire, the maximum amount a person could receive for their basic State Pension will be more than £107.45.
- The cost of living will also invariably increase. So, while my husband and I will hopefully be paying out for less things, those things will undoubtedly be more expensive than they are now.
- We may have some form of inheritance to fall back on from deceased relatives by this time. However, this doesn't form part of mine or my husband's thinking in any way.
- I have conveniently forgotten that Christmas is on its way and have not included the cost of present buying for such events in my comparison.
Weekly budget vs State PensionI could see straight away that our average weekly shop just about eclipsed the State Pension's £107.45 - yikes! However, with two young children in the house it's no surprise that our weekly shop regularly goes into three figures. And I'm presuming it will get more expensive as they get older, before it becomes less of a strain on our wallets.
Then there's the bills to pay and we all know how expensive gas and electricity can be. It's November now so the heating is most definitely on in the evenings and the colder the weather gets, the longer the heating will stay on for. In my experience, energy companies like increasing bill payments but don't like to reduce them so I can't see this getting much cheaper in the long-run. Plus the house will always need the same amount of heating to keep it warm, regardless of how many people are living there.
As for things like insurance policies and car-related bills, we prefer to pay these in one lump sum so it doesn't impact on our weekly budget. However, we still need money to be able to pay these off in one go and if I was retired right now and depending on the basic State Pension, I'd have no money whatsoever to put aside for these expenses.
All told, our current weekly budget outstrips the basic State Pension by far. But, this is a weekly budget for a family with two small children and a cat, it's not a budget for two pensioners. Having said that though, if I tried to estimate what mine and my husband's costs would be if it were just the two of us in old age, I think our budget would probably still add up to slightly more than the State Pension by about, say £50...maybe.
It's certainly food for thought, making me realise just how careful we might need to be with our money when we retire and also how important it is to save for our future. It's so easy to dismiss the need for a pension because retirement is something that seems so far away. It's a very sobering thought indeed though when you think we might live for another twenty years or so after we've retired, relying on savings and the State Pension to see us through.
The Government's introduced an auto-enrolment element to workplace pension schemes in an effort to get more people saving for their old age. It's being phased in over the next few years but large employers are legally obliged to begin doing this from this year with smaller companies expected to follow suit. It's definitely a start, but this doesn't mean we should rest on our laurels, or depend on others to sort out our retirement funds for us. One thing this challenge has shown me is that we need to take responsibility for our own money, cut our cloth according to our budget and think long-term.
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