How are you doing compared to everyone else?
🔸 Plus: “What if you left it too late to start investing?” The classic question answered, again 🔸 Bar bosses can’t skim your tips anymore 🔸 A woman says she’s addicted to Rightmove 🔸
Your 2-minute guide to demystifying money and making you richer
The markets, year-to-date
S&P 500: 5,815.03 ⬆️ 22.61%
FTSE 100: 8,253.65 ⬆️ 6.89%
Bitcoin: $63,126.50 ⬆️ 41.81%
GBP to USD: $1.3067 ⬆️ 2.67%
GBP to EUR: €1.1957 ⬆️ 3.69%
As of market close on Friday
Comparison is the thief of joy. But let’s do it anyway!
Back in 2012, the UK government changed the law around pensions in a way that offered every employee in the country a chance to start gaining serious personal wealth.
The law introduced “automatic enrolment” in workplace pension schemes. From 2012 onward, every worker now receives the tax breaks and matching payment benefits of a pension plan — unless they affirmatively opt out.
The law was introduced because fewer and fewer employers were offering pension plans, especially the kind of “defined benefit” (DB) pension that paid you a percentage of your salary for life after retirement. Only one in 10 private sector workers is now in a DB scheme. DB plans now barely exist outside the public sector.
The result of the change has been broadly positive. In 2012, fewer than 50% of UK employees had a pension plan of any kind. Today, 80% of all workers have pensions, as this chart from the Institute for Fiscal Studies shows:
Most of those pensions are “defined contribution” (DC) plans, where a percentage of your salary is paid into a private pension plan and you manage the investment yourself.
A workplace pension comes with a 3% cash match from your employer and the money saved into it is not taxed. You keep 100% of the money that goes into your pension. That means you’re saving at least 20% of the money that would normally go to the government plus the 3% from your employer.
Financially, it’s the best deal out there.
So, 12 years later, how are we all doing?
Here’s how it breaks down by age group. The good news is that across all age cohorts, more and more people are contributing to a DC pension as time goes by:
The bad news is that people are saving very little
This next chart shows how much pension wealth is held by people aged 50-59, who face imminent retirement. It is broken down into income percentiles, with the top 100th percentile being the richest among us and the bottom first percentile being the poorest. The chart shows that at the 75th percentile — where people are better off than 74% of people below them but not as rich as the 25% of people above them — those with DC plans have £103,500 saved and those with DB plans have £464,500.
That difference — old-fashioned DB plans are worth four times DC plans — shows you what we lost when companies stopped offering DB plans in the 1990s. It also shows you why companies switched to DC plans — DB plans are so expensive that only the government can now afford to provide them.
Rich v poor
Depressingly, average DC plan holders at the 50th percentile have less than $50,000 saved by the time they are nearing retirement.
For most of us, that’s not going to be enough.
Here’s another chart, of retirement income at age 66, ranked from the poorest percentile to the richest:
The wealthiest 2% have annual retirement incomes of over £120,000.
Everyone else is getting by on less than £80,000 a year.
Worryingly, about 50% of retired Brits get by on £20,000 a year or less.
That includes the state pension, which is only £11,502 a year.
Clearly, the lesson is that if you want an annual income of more than £11,000 a year you need to start saving and investing now. And that means saving as much of your paycheck as you can into your work pension.
Your workplace pension is, in fact, the very best financial vehicle to do that because it gives you an extra 20% in free money from a tax break plus a guaranteed match of 3% cash from your employer.
The only downside of automatic enrolment is that if you don’t know how to invest your savings — for instance by making the mistake of keeping it in cash instead of investing in stocks — then you could increase the amount of time it takes you to reach financial security and independence.
This is why Moneyin2 exists, to show you the ropes! The Moneyin2 Guide to Wealth is a good place to start.
The Moneyin2 Guide to Wealth
The Moneyin2 Guide to Wealth will get you the biggest return on your savings by maximising cash matches from your employer, free cash from the government, and shielding your investment gains from tax. It takes you step-by-step through the world of pensions, SIPPs, ISAs and ETFs — all in plain English.
And for dessert …
“What if you left it too late to start investing?” A lengthy discussion of the oldest problem in personal finance from The Monevator. Here’s Moneyin2’s much shorter version.
The Tipping Act is now in effect. From October 1, workers must receive all tips given to them by customers. Employers cannot skim them anymore.
30-year-old woman told the BBC she is addicted to Rightmove. “Rightmove is my porn," Katie Smith says. "It's like being a modern day peeping Tom.”
8.6 million British people have more than £10,000 in cash savings, and they aren’t investing it. Three million have more than £20,000 in cash but nothing in stocks and shares. It’s a “cultural” issue, the FT says, even though there are long-term risks to holding cash.
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