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Barnett Waddingham
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Let's talk about Affordability

Published by Damian Stancombe on

Estimated reading time: 1 minute

The Defined Contribution (DC) pension formula (growth stage) is pivoted on the trinity of how long you put money in to it, how much you put in and the net investment return.

Given few people have the ability to beat an index, even those who think they can, we tend focus on the contribution aspect of the formula.

However, the real issue is not the contribution, it is the affordability of the contribution that is important. Our disposable income is competing against other needs of today, including the basics such as food, clothing, shelter, transport and heating. Our aspirations for tomorrow might include a simple holiday rather, than thinking about the one day; e.g. the size of a retirement fund.

Not thinking about affordability risks alienating people from saving. It also means that an opportunity is missed to help people understand ways in which they can save vs their outgoings; e.g. debt consolidation or discount shopping.  People can then learn how to put this money towards saving a pot for today which can flow into tomorrow and to the one day.

By not thinking affordability we fail to educate about smarter ways to save, like the Power of One. This works on the basis that increasing pension contributions to, say, as little as 1% of a salary each year could have a significant impact on the amount of money in retirement; i.e. incremental increases rather than hefty % amounts.

So, when it comes to engaging people to save for the one day, it’s important to start from their needs today.

About the author

  • Damian Stancombe

    Damian heads up the Workplace Health and Wealth team for Barnett Waddingham. Damian advises a range of UK corporate and trustee clients on their workplace health and wealth issues; from scheme design through to ongoing governance for all defined contribution arrangements.

    View Biography

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