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02 Jun 2016

UK pension pots reaching record high

New research has suggested that the value of the average defined contribution (DC) pension pot stands almost equal to the all-time high recorded in the first quarter of 2015, the Money Facts website reports.

According to studies conducted by Close Brothers Asset Management, a typical DC pension pot - which the majority of people pay into - came in at £15,579 in April this year. That´s slightly higher than the average pot at the end of 2015 (£15,501), and only 2% less than the £16,062 record high from Q1 2015.

This means the typical pot has grown by an impressive 136% since numbers recorded in 2002; this is particularly good news for savers aged 25-34, who have profited from the improving stock market and, as a result, seen speedier growth in pension savings than previous generations. In contrast, the pension pots of those aged 65 and over have seen a 120% growth since 2002.

The article explains that this is largely because younger savers tend to put their money into higher-risk investments, as they deem themselves to have time to weather volatile markets. Therefore, while the financial crash did impact them, they have since been able to benefit from the rebounding stock market - and fast.

On the other hand, savers approaching retirement age will, on the whole, have invested their money in ‘safer´ areas. While they have also benefited from the recent recovery, this is not to the same extent as younger savers.

That being said, younger savers still have the smallest pension pots overall, with an average of £5,360 compared to £29,417 for those aged 65+; but they also have more time to build on that amount.

The analysis suggested that continuing to take a higher-risk approach would help younger savers achieve their retirement goals. For example, a 25-year-old earning £25,000 per year could achieve an annual retirement income of £16,000 by saving just £1,500 per year with a high-risk strategy, as opposed to £6,900 per year with a low-risk approach.

Meanwhile, a pension pot of £500,000 would be needed for a 65-year-old to have the same retirement income.

Andy Cumming, head of advice at Close Brothers Asset Management, noted that: “If savers opt to take no risk […] 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 added.

Copyright M2 Bespoke 2016

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