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How much should you have saved in a pension?

Karl 24th Nov 2022 No Comments

Reading Time: 7 minutes

The size of your pension pot will have a massive impact on your quality of life during retirement.

So, are you on track for a comfortable retirement, with the freedom to go on numerous overseas holidays? Or is keeping on top of essential bills the best you can realistically hope to achieve?

In this article we’re going to look at the kind of retirement you could be facing based on the size of your current pot. And if you’re worried it’s too small, don’t fret – we’ve ways to boost it too!

Keep on reading for all the details or click on a link to head straight to a section…

Private pensions explained

There are two types of pension in the UK: private pensions and the state pension.

A private pension refers to a pension that belongs to you.

A workplace pension is an example of a private pension. This is where you save into your pension each month from your gross salary.

Typically your contributions will be matched by your employer, up to a limit. The minimum employer contribution level is 3%, and total contributions must be at least 8%. So if your employer contributes 5%, you must contribute at least 3%.

If you’re self-employed then you won’t have a workplace pension. Instead you can put money into a private pension by opening a Self-Invested Personal Pension (SIPP).

Importantly, you can’t just dip into your retirement funds whenever you feel like it. Anything you’ve stashed away must stay there until you’re 55 years old. Once you do hit this milestone, you’re allowed to access up to 25% of your pension pot without having to pay tax on the amount you withdraw. You can also choose to buy an annuity from 55 onwards.

Anything left in your pot will be there to support you through your later years.

Defined Contribution vs Defined Benefit pensions

When it comes to private pensions, the most popular type is known as a ‘defined contribution’ pension. Under DC schemes, the size of your pot will depend on how much you’ve contributed over your working life, plus any investment gains.

The other type of private pension is a ‘defined benefit’ pension. Under DB pensions, the size of your pot may depend on how much you earned at a particular employer or how long you were employed.

While DB pensions still exist in in the public sector, DC schemes are far more common in the private sector – mostly because they’re cheaper.

The state pension

The State Pension is entirely separate from private pensions. You can receive the State Pension, while also drawing an income from your private pot.

To qualify for the full new State Pension, currently worth £185.15 per week, you’ll need to have 35+ years of qualifying National Insurance payments.

To qualify for the less generous basic State Pension you’ll need at least 10 qualifying years under your belt. The actual amount you’ll receive will be based on how many years you’ve paid in.

The State Pension is currently paid to those aged 66+. However, the qualifying age will rise to 67 by 2028, and to 68 some time before 2046.

The future of the state pension

The State Pension currently costs the Government £105 billion per year, and this figure is set to balloon over the coming years, mainly for two reasons:

  • The ‘Triple Lock’. The controversial policy ensures the State Pension rises by September’s inflation figure, average earnings, or 2.5% – whichever is highest.
  • The UK’s ageing population. The UK currently has 11 million people aged 65+. By 2032, this figure is expected to rise by 2 million.

Of course, one way to alleviate the financial burden is to increase the age at which retirees qualify for the State Pension. This is something that has already been done by successive Governments. Yet there is a limit as to how high the qualifying age can go up by. People do, sadly, become too old to work, and average life expectancy in the UK is a tad above 80.

Because of this, many have questioned the future viability of the State Pension.

Without a crystal ball, we of course don’t know what the State Pension will look like in future. However, if you are worried about whether you’ll have access to a state-supported retirement in future, the good news is that there are actions you can take now to boost your private pension pot – something you do have control over. (More on this below).

How much do you need to have saved in a pension?

Understanding how much you need to have saved into a pension is similar to asking how long is a piece of string.

That’s because the size of your pot will need to match your retirement expectations. For example, if you’re aiming for a comfortable retirement with the freedom to make frivolous purchases then your pension pot will need to be bigger than someone happy with a basic retirement.

So, if you know what kind of retirement you want in the future, here’s the kind of annual income you’ll need to have for according to Retirement Living Standards.

Basic retirement: £10,900 per year

A single person (living outside of London) needs a retirement income of £10,900 per year to afford a ‘basic’ income once they give up work. For couples, it’s £19,700.

A basic retirement should allow you to cover essential bills, but little much else. Extravagant overseas holidays and visits to expensive restaurants will certainly be off the cards.

Moderate retirement: £20,800 per year

If you’re looking for a moderate retirement income, an individual will need £20,800, while couples will need a combined total of £30,600 per year.

This level of income should allow for a few meals out every month. Running a second-hand car should also be possible, in addition to the odd overseas holiday.

Comfortable retirement: £33,600 per year

To enjoy a Rolls-Royce retirement, an individual will require a retirement income of £33,600 per year, or £49,700 for couples.

At this level of annual income, a retiree should be able to afford multiple foreign holidays per year, as well as the freedom to buy a new car every five years or so. Spontaneous purchases will also be financially possible at this income level.

So… how much do i need to have saved in my pot?

Unfortunately we can’t tell you exactly how much you should have saved in your retirement pot to hit any of the above annual income targets for retirement. That’s because the income your pension generates depends on a number of factors, such as long-term investment performance, and whether or not you’ve chosen to buy an annuity.

On a similar note, if you’re happy to work part-time during retirement, or delay the age you give up work, this will reduce the need for a bulky retirement fund.

Tips to boost your retirement income

If you’re worried about the size of your pension pot, here are five tips to boost your income in retirement.

1. Start early

The new(ish) auto-enrolment workplace pension scheme means that employees now have to actively opt-out of a workplace pension. Because of this there’s been a huge uplift in the number of people saving for retirement. However, if you’ve opted out of a workplace pension, or you don’t qualify for one, then it’s worth taking action now in order to boost your retirement prospects.

Starting early is important as it gives more time for your pension pot to grow thanks to the magic of compound interest.

If you haven’t been saving for retirement, you can reassure yourself that it’s never too late to change bad habits. As the Chinese proverb goes: “The best time to plant a tree was 20 years ago. The second best time is now.” 

2. Max your pension contributions

If you can afford to do so, it’s worth maximising your contributions as they come from your (pre-tax) gross salary. Not only will this help boost your pension pot, but your employer may also match additional contributions. Under current rules, the minimum you must contribute into a workplace pension is 8% (including both employer and employee contributions).

Money Magpie CEO, Jasmine Birtles, echoes the importance of saving as much as you can.

“Whenever I’m asked how much someone should put in their pension I always say ‘more than whatever you’re putting in at the moment!’. We all tend to underestimate how much we will need to live off in retirement so I always recommend that people put in any extra cash they can afford on a regular basis.”

3. Re-direct pay rises into your pension

As your career progresses, you may (hopefully) pocket a pay rise or two. Stash it all into your pension, or at least a percentage of it, and you won’t notice the drop in your take-home pay.

4. Consider paying in a lump sum

You’re allowed to make a single contribution into your private pension at any time, subject to annual limits. So if you have a stash of cash and don’t know what to do with it, topping it up could be a wise decision. Don’t forget that you’ll get tax relief too!

5. Consider alternative ways to save for retirement

While saving into a pension is an effective way to boost your retirement income, it’s not the only way.

Buying property and saving into ISAs are both credible alternatives, as Jasmine Birtles explains: “Of course one’s retirement fund doesn’t have to all be in pension products. Ideally it’s a good idea to have a mix of investments including tax-saving ISAs, of course, and even an extra property if one has the money (that’s a tough one for most, though, as it involves a big outlay at the start).

“However, pensions have the big advantage of extra tax-saving from the start and, if it’s a company pension, free money from your employer added in, so if you can add to that, and your boss promises to match your contributions, you’d be daft not to!”

To learn more about retirement and investing, sign up for our fortnightly MoneyMagpie Investing Newsletter.

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.

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Jasmine Birtles

Your money-making expert. Financial journalist, TV and radio personality.

Jasmine Birtles

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