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Whether we’re saving for a holiday, a deposit for a house or a wedding, most of us have financial goals with clear targets throughout our lives.
However, when it comes to retirement – a major milestone – people often bury their heads in the sand and put off making firm plans. Often, they pay into their workplace pension without really thinking about what their yearly income will be and whether it’s enough to cover their living expenses.
One of the problems is that retirement can feel a long way away when you’re younger, and building a savings pot might not feel like a priority when you have other costs like rent, mortgage or childcare.
Saving for retirement can feel like a big unknown too. We all want to enjoy our hard-earned money and live life to the full without constantly counting the pennies. Yet running out of funds is a risk too. Few of us know exactly how long we’ll live and what care needs we’ll have as we get older.
How much money do you need to retire?
Like everything, it all depends on your personal circumstances. The list is by no means exhaustive but factors to consider include your financial commitments, health, whether you’re married or not, your other income sources, your attitude to risk, and lifestyle and expectations. The economic climate will also determine how much your pension fund is worth when you come to draw it and how far it’ll stretch. The MoneyHelper website points out that you may need to withdraw more than you thought due to inflation.
Unlike other types of savings and investments, a pension can provide a regular income throughout retirement. This is certainly true of the state pension (at least for now) but workplace, personal and self-invested pensions are more complicated because of the sheer number of products and the withdrawal options available.
A lifetime annuity, for example, provides a guaranteed income for life but there are drawbacks. You cannot normally cash it in early if your health takes a turn for the worse and you no longer expect to enjoy a long retirement. Another problem is that the payments usually stop when you die so your loved ones won’t receive an income. That said, there are numerous annuity products, including joint and survivor policies for spouses, so explore all the options on the market before making a decision.
You can learn more about this in our guide: What Happens To Pension Annuities After Death?
A pension drawdown, on the other hand, allows you to increase your payments but with this comes the risk that your money will run out. For more information about the pros and cons of pension drawdown versus annuities, check out our in depth article.
What’s in the pension pot?
As mentioned previously, it’s easy to pay into a workplace or personal pension during your working life without really thinking about how much it is actually worth. It’s even more difficult to keep track of the total value if you’ve accumulated multiple pensions from different employers over the years.
But knowing what your investments are likely to yield is critical for planning your future. It gives you an opportunity to boost your pension pot – for example, increasing your contributions when you receive a pay rise or start a new job. Paying more into your pension is often tax-efficient too, as explained here.
While auto-enrollment should help to provide more people with a retirement income, the government is worried that 60% aren’t paying enough and many are still excluded (including self-employed workers). One concern is that auto-enrollment has created a ‘false sense of security‘ because employees believe they only have to pay in the minimum amount to enjoy a good retirement.
The government’s new pensions dashboard is designed to bring together people’s pensions in one place, so they can keep track of how they’re performing and make better decisions. But it’s never too early to start collating your pensions, even if you have to do it manually. You could be missing out on valuable opportunities to increase your funds and reduce the amount of tax you pay. It’s also worth tracking down old pensions as you might be pleasantly surprised – our blog explains how you can do this.
How much pension do you need to retire?
It’s useful to have a target figure in mind when planning your retirement but what this is depends on your individual circumstances, including your current income and lifestyle.
The Pension and Lifetime Savings Association (PLSA) has identified three income levels for retirement for both single and two-person households:
Minimum lifestyle (covers all your needs, with some left over for fun)
Single: £10,900; couple: £16,700
Moderate lifestyle (more financial security and flexibility)
Single £23,300; couple: £34,000
Comfortable lifestyle (more financial freedom and some luxuries):
Single £37,300; couple: £54,500
Using the average UK life expectancy of 81 as a rough guide, you can work from the figures above to determine your total retirement fund. For example, an individual living alone, looking to retire at 60 with a comfortable lifestyle, should be aiming for £783,300.
Not all of this needs to come from pensions though. With generous final salary pensions largely a thing of the past, more people are diversifying their portfolio in order to maximise their yields and spread risk. Typically this includes stocks and shares, and buy-to-let property. You can also top up your income by continuing to work beyond the state pension age, and either claim your pension or defer it. If you choose the second option, your payments will be more when you start drawing it.
How much do you need to retire at 55?
You can use the figures above to work out how much you’ll need, working from 55 instead of 60. Bear in mind though that your pension will need to stretch further especially if you live into your 90s or beyond.
Just as deferring your pension results in higher payments, taking it early does the opposite. A drawdown allows you to access your pension while continuing to invest the remainder but since you’re still taking from the fund, there’s a risk that you’ll run out of money.
Always check the terms and conditions of your plan if you’re considering drawing your pension early, and remember that the minimum age to access it will increase from 55 to 57 in 2028.
Tailored pension plans
It’s always worth having a figure in mind, and a good starting point is a pension calculator, which provides an estimate based on your age, your pensions and your target income in retirement among other things. Since pension planning can be complex, it’s helpful to speak to a pensions advisor who can guide you on the most suitable options available to you.
The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.
