Bridging your Pensions Gap

Good planning is essential if you want to retire with enough money to enjoy a comfortable lifestyle.

Many Brits who have settled in New Zealand and Kiwis who have returned from the UK transfer their UK pension funds to New Zealand. Transferring your UK pension is a good way of gaining more control over how your pension funds are invested, and even when you can access them. But in the majority of cases even this exchange-rate boosted cushion of retirement savings will not ensure that you can enjoy the lifestyle you want in retirement.

The answer of course is to re-start pension savings on a monthly basis. We can understand why you don’t do this in your first few months in New Zealand - it is a very expensive time, and you’ll need to work out how much you can spare from your monthly income to put into your pension pot. But it could really start affecting your prospects for a comfortable retirement if you wait for more than a couple of months before contributing to a pension.

The Pensions Gap

The gap between the funds you’ll have when you retire and the funds you’ll need to enjoy a comfortable lifestyle in retirement is called the Pensions Gap. Working out your pensions gap requires a number of calculations, some of them uncomfortable (How long do you think you will live for? And your partner?), others really just educated guesses (What will the average rate of inflation be until you retire? What will the rate of NZ Superannuation be?).

But let’s just say that you are in your mid-forties, and you are ready to get serious about saving for retirement. You’ve got about 20 years to put enough aside to last you for around 20-30 years – you may find that a pensions gap analysis requires you to save about 40% of your net income towards your retirement.

Of course, many people can’t afford this level of monthly commitment - but the longer you wait to start saving for your retirement, the bigger the gap between what you’ll have and what you’ll need becomes. Something is better than nothing, so even a contribution of $250 a month is worthwhile. If you have got a couple of decades before you expect to retire, you’ll find that compounding interest makes even a modest monthly contribution quite significant in the long term.

"I’ll be fine – I’ll move to a smaller house and live off the capital I free up"

Most people expect to have paid off their mortgage well before they retire. If you are living in a very large house on a very large section, you may well be able to free up some capital by moving to a smaller home. But if you are living in an average suburban family home, you will probably find that you are not really ready to downsize the moment you retire. And even when you do decide to move, you may find that a newish, reasonably sized smaller home in a convenient location is pretty expensive. A typical home is not really much of a retirement asset while you still need somewhere to live.

"I’ll be fine – I qualify for a state pension"

New Zealand Superannuation is currently pegged at 66% of the average wage, so it is not an insignificant sum. But even if you were retiring tomorrow you would find that relying on NZ Superannuation alone would not cover much more than the basics. And if you are expecting to retire in a couple of decades, you’ll probably find NZ Superannuation will have changed quite significantly.

The working population is getting lower as a percentage of total population with the percentage of those in retirement growing. The birth rate is slowing so the situation will only get worse. The government is going to find NZ Superannuation increasingly hard to fund, and is going to have to tinker with it at some stage – we expect to see an increase in the age when people qualify for NZ Superannuation and/or a reduction in the payments well before we retire.

"But I’m contributing to KiwiSaver…"

KiwiSaver is a great start, and we suggest that you make the most of the government and employer contributions. But useful though your KiwiSaver lump sum may be, you need to make sure that it will be enough to fund the retirement lifestyle that you would like – especially as the age when you can access your KiwiSaver fund is likely to rise along with the age when you qualify for NZ Superannuation.

"I’ll wait for markets to recover…"

The economic turmoil of the last year has given invested funds quite a battering. You could be forgiven for thinking that the economic conditions are not conducive to saving – but a good fund manager will find considerable value in the current markets, with quality shares cheaper than they have been for years. Nobody can pick the bottom of the market with any great certainty until well after it has occurred. If you continue saving a regular monthly sum in a quality fund when the markets are bad, your monthly contribution will buy more units. When the markets improve, your units will be worth more, accelerating your investment returns. If you have a decade or two left before you expect to retire, you have the luxury of time on your side – continuing to invest wisely through a downturn is a great way to make the best of this.

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