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Get an extra £87,000 by forfeiting your favourite pizza

PUBLISHED: 17:39 20 March 2018 | UPDATED: 17:39 20 March 2018

Giving up pizza could boost your pension. Picture: Getty images

Giving up pizza could boost your pension. Picture: Getty images

svariophoto

Together with the arrival of small bunches of daffodils, early spring also yields a flurry of government spending reviews, growth forecasts and other estimates of future economic activity, many of which will be ‘amended’ (such a helpful euphemism) before the end of the year.

This column is brought to you in association with Almary Green. Photo: Almary GreenThis column is brought to you in association with Almary Green. Photo: Almary Green

Last week, Chancellor Phillip Hammond hinted that austerity measures could be eased by late autumn if public finances continue to improve after he confirmed “the first sustained fall in debt for 17 years, a turning point in the nation’s recovery from the financial crisis of a decade ago.”

Forecasts of future prosperity and how effectively our economic ills will be cured (jam tomorrow, anyone?) are, and always have been, ten-a-penny. Yet there’s one area where UK progress has not only been impressive, it’s been replicated, or planned, in several other countries and jurisdictions. I was interested to note that the UK’s approach to ‘pension freedoms’ has recently been replicated in the Isle of Man and, to a lesser degree, in Guernsey.

Last month, Treasury Minister Alfred Cannan MHK announced a new pension scheme for the Isle of Man similar to the one introduced here three years ago.

Having catered for the Island’s older generation, Mr Cannan appears intent on bringing the under 55s into the pensions fold, releasing brief details of a consultation process, scheduled to start later this year, focusing on how best to introduce compulsory workplace pensions, a move the UK took six years ago.

Peter SharkeyPeter Sharkey

In 2012, the UK decided to phase in a system where both employers and employees contribute gradually increasing amounts to workplace pensions. By April 2019, contribution levels will reach 8% of salary, with 4% paid in by employees, 3% by employers and 1% from tax relief.

The numbers participating in auto-enrolment had risen from zero to nine million by the end of last year. The Department for Work and Pensions estimates this will reach ten million by 2020, but are we saving enough?

Australia, often cited as a model for the UK’s workplace pensions programme, has operated a compulsory pension savings scheme since 1992. When introduced, employers paid a minimum 3% of their employees’ salary into their pension pot; ten years’ later, mandatory contributions increased to 9% and by 2019, the total will be 12%, a level that can be topped up with voluntary contributions.

Frankly, forecasted Aussie contribution levels appear considerably more likely to provide a pension income when a person reaches retirement instead of being a small, but welcome, supplement to the state pension.

Guernsey, scheduled to introduce its workplace pension scheme from 2020, has taken note. While islanders will start paying 1% of their earnings into the schemes, the figure will increase to 6.5% over the following decade; this sum will be supplemented by a 3.5% employer contribution.

Figures suggest that workplace pensions have proved enormously popular, but the longer-term effect suggests how much better off the average Australian will be to her British counterparts.

Consider a 28-year-old earning £27,000 a year. From 2019, 8% of this salary (£2,160) will be paid into a workplace pension.

Let’s assume our imaginary individual’s salary rises by 2% a year and contributions to her workplace pension remain fixed at 8%. Three further assumptions: first, that all returns and dividends are re-invested and second that they’re compounded at an annual rate of 4.5%, slightly below the longer-term growth rate of shares. Finally, let’s assume a 30-year period of contributions.

Based on this, by the time our fictional worker reaches 58, her pension would be worth £175,569.

However, under Australian rules, which would cost an extra £20 a week (and gradually increase, pro-rata, over the same three decade period), our fictional worker would have a pension worth £263,314, ie £87,745 more. This is a substantial difference for little more than the cost of a pizza and a couple of drinks a week.

The degree to which the UK’s workplace pension initiatives have been copied is testament to their effectiveness. Nonetheless, until plans to raise contribution levels to 12% are announced – and none are planned – it could make enormous sense to copy the Aussies, open an ISA and add £20 a week to it, even if it means forfeiting the occasional pizza.

The Week In Numbers

9

“Men, you must be strong now!”, declared a headline in German biggest-selling newspaper Bild last week after it announced it would be ending its decade-long practice of featuring topless female models. The headline appeared on page nine, or as our Teutonic friends say: Nein!

2.5 million

Estimated number of van drivers on our roads. This army of ‘white van men’ could be in the Treasury’s sights for a tax raid under plans to reduce pollution (allegedly) as most vehicles are fuelled by diesel.

2019

The irrepressible Elon Musk, whose company SpaceX is designing a rocket for interplanetary travel, has said that “up-and-down flights” to Mars should start early next year. The only drawback, says Mr Musk, is there’s a “good chance you’ll die”.

45%

Allowing university students to pet dogs during exams helps lower stress and aids their performance. According to a study published in Canada, students experienced a 45% fall in stress levels if they were permitted to ‘interact’ with dogs during exams.

538

The number of genes linked to intelligence discovered by scientists at the University of Edinburgh and Harvard University following the study of 240,000 people. It means a person’s IQ can be predicted from their DNA.

2-6%

Facebook, Google, Amazon and Apple, amongst others, face higher taxes following a Treasury announcement that it planned to introduce a levy on revenues earned in the UK.

Peter Sharkey read economics at the University of Bristol. He was an accountant on three continents and has been a company director and investor for more than 30 years, building and selling three different companies.

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