Building up a suitable pension pot is a must if you want to look forward to a comfortable retirement, and happily, the value of the typical pension pot is on the rise – and lots of it is thanks to rebounding stock markets.
Research from Close Brothers Asset Management shows that the value of a typical defined contribution (DC) pension pot – which most people are now paying into – stood at £15,579 in April, up from £15,501 at the end of 2015 and just 2% off the all-time high of £16,062 recorded in that year's first quarter.
This positive market movement also means that the typical pot has now grown by 136% since 2002, and in good news for younger savers, it's those aged 25-34 who have been able to benefit most from the improving stock market: this age group has seen faster growth in pension savings than their older counterparts with their typical pots rising by 168% since 2002, while those aged 65+ have seen slower growth of 120% over the same period.
This is largely due to where younger savers' funds are placed. Typically, younger savers favour a higher risk portfolio – and even if they don't manage their funds themselves, their investments will often be defaulted into slightly higher risk areas as they've got more time to save and weather the storm of volatility. This means that they've been able to quickly benefit from the rebounding stock market, as although the financial crisis affected them, the recent improvement is clear.
Conversely, those approaching pension age will have their funds invested in safer, less risky areas, as volatility can have a greater impact in the short term. This means that they, too, have benefited form the recent rebound, but not to the same extent as the younger age group whose market sectors have experienced the keenest growth.
Of course, younger savers still have smaller pots overall – standing at an average of £5,360 compared with the £29,417 pot of those aged 65 and above – but they've got far longer to build it up. And, if they continue to take a higher-risk approach, they're far more likely to achieve their retirement goals: the analysis revealed that, to achieve a retirement income of £16,000, a 25-year old earning £25,000 per year would need to save £6,900 per year if they took a low-risk strategy, or just £1,500 if they opted for a higher-risk approach.
However, the average pot of £29,417 held by today's 65-year-old wouldn't even come close to achieving a £16,000/year income, with a pot of £500,000 actually being necessary. This highlights the importance of not only saving more, but also of taking the right strategy, as Andy Cumming, head of Advice at Close Brothers Asset Management, comments: "There is no doubt that markets matter to pension savers, [but] savings are worryingly low across all age groups as generous DB schemes fall by the wayside.
"People cannot escape the need to save more, but it's all the more important that they understand how financial markets can do a lot of the heavy lifting. If savers opt to take no risk, or simply stuffed cash under the mattress, they will never hit retirement goals, or would have to set aside increasingly unaffordable sums while working. Simply setting aside money isn't enough. You have to set it aside in the right place, unlocking the potential for long-term growth."
He adds that taking financial advice is crucial, "allowing savers to match long-term financial goals to the right investment approach to get them there", and at the very least, if you're yet to enrol in your workplace pension scheme, it's time to sign up! Starting early is key, so start the process by finding out more about automatic enrolment and begin your pension journey.
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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