Entrepreneurs don’t usually like to think about pensions. The cost of pension must not be underestimated. Many workers’ dream is to retire young.
For young entrepreneurs, the subject is a combination of too far away, too complex and too boring, and too depressing. People don’t like reality. The reality is retirement is imminent.
When determining how much money you need to retire, you must consider that you might live for 20, 25 or even 30 years after you stop working.
Depending on your age, the question you think about a lot is if pension is imminent and how much money do you need to retire?
However research by the Economist shows that the best annuity rate at the moment in the UK is just under 5.2% which means you would need a pot of £385,000 to afford this. But on the other hand, that is a flat £20,000 which does not account for inflation; if prices rise at 3% a year, the value of that pension will halve by your 90th birthday. (The cedi amount won’t be the same but it is in the ballpark)
This means that one problem is hard to avoid; the annuity rate is risk-free at least when it is inflation-linked. If you think you can do better, then you have to take risk. And to do a lot better, you have to take a lot of risk.
These are very big sums and explain why private sector employers have been dropping final-salary pension plans. However to work out the true cost, you have to discount that future liability by some rate to work out how much you and the employee have to contribute now.
Note that building up a pension pot is just as important as taking an income. Pensions will be paid by a combination of employer/employee contributions and investment returns. So to work out the right level of contributions, calculate the returns.
By Rebecca Essilfie