SAVERS must stash £285,000 into their pension pot over their working lives to afford a “moderate” retirement.
The Pensions and Lifetime Savings Association calculates that you’d need a retirement income of £23,300 a year to have a reasonably comfortable lifestyle, keep a car and take one foreign holiday a year.
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Added to the full state pension, currently £10,600 a year, it means a single person retiring at 66 would need to generate an extra income of £12,700 a year.
Insurer Standard Life looked at current annuity rates and found that to guarantee that income and ensure it rises every year to keep up with the cost of living, it would take £285,000 in pension savings.
For a more lavish lifestyle you’d need a whopping £530,000 in pension savings.
This would pay for three holidays in Europe each year and around £145 a week to spend on groceries and meals out.
To pay for the basics and one week’s holiday in the UK a year but no car, you would need an extra £2,200 a year on top of the state pension.
To guarantee that level of income rises with inflation, the insurer said you’d need a pension pot worth £50,000 by the time you retire.
Dean Butler, managing director for Retail Direct at Standard Life said: “These figures are just a guide and individual circumstances will vary but it helps to have a target in mind.”
How much should you save for retirement?
Dean said you should consider a number of factors to decide what you need to save.
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Life costs more in different parts of the country, for example.
And it’s worth thinking about whether you’ll need to pay rent or will still be paying off your mortgage after you retire.
Dean said: “The numbers we’ve looked at don’t account for housing costs, which a significant minority of retirees currently have.
“Many more pensioners are predicted to have housing costs in the future as longer-term mortgages surge in popularity.”
Do you have a pension?
You may have heard the term “auto-enrolment“.
This is when you’re automatically placed into your workplace pension scheme, with the amount you save in deducted from your pay packet.
The law states that all employees aged between 22 and state pension age must be auto-enrolled into their workplace pension if they earn more than £6,240 a year.
You can choose to join from age 18 but you will need to ask HR to opt you in manually.
A minimum of 8% of your salary must be paid into the pension, with you contributing 5% and your employer paying at least 3%.
You can choose to pay more than this though and many companies will match higher contributions, helping you to save more, much faster.
It’s different from the state pension and should provide you with extra income when you retire.
You can choose to opt out of a workplace pension, which would increase your monthly salary.
However, it’s best to do this only as a last resort, as you’ll have less in later life.
What is a comfortable retirement?
The Pensions & Lifetime Savings Association regularly looks how much you’d need to have coming in each year to afford different levels of comfort after you retire.
They count all household bills, groceries and eating out, travel costs and owning a car, holidays, TV subscriptions such as Netflix, clothes, beauty treatments and even money spent on giving birthday presents.
With the soaring cost of living, the amount of money needed to fund retirement has shot up.
But there is a glimmer of good news if you’re heading for retirement soon.
Annuity rates are rising
When you retire you can choose to take up to 25% of your pension pot as a tax-free cash lump sum.
This can be useful to pay off the mortgage or clear any other debts. You could even use it to move home or treat the family.
The remainder is then converted into a taxable lifetime income.
Either you can keep this money in your pension and withdraw the income from the investments held in it.
With this option the amount of income you get can go up and down, as can the value of your pension pot.
Or you can buy an annuity – a type of retirement product you purchase with the money from your pension pot.
This pays you a guaranteed income for life.
The amount paid out by the annuity is determined by how much money you have in your pension pot and the interest rates on offer.
Retirees typically use it to cover monthly living expenses.
The Bank of England has been raising interest rates since December 2021 and as a result, annuity rates have also got higher.
Dean said: “Annuity rates have improved by 20% in the last year, meaning people are getting much more value for their money.
“It means pensioners can generate larger incomes from their savings.
“The value and certainty offered by a guaranteed income seems to be becoming harder to ignore.”
You only get one shot at buying an annuity so you need to get it right first time.
In order to get the best value, you need to shop around as your current pension provider might not offer the most for your money.
State pension boost
The state pension is a weekly payment from the government to UK residents aged over 66 and it’s separate from your work pension, meaning you get it on top.
The amount you get depends on how much national insurance you have paid over your career.
You can use a government tool to find out how many years of contributions you have and how much state pension you’re likely to get.
You need at least ten years of qualifying national insurance contributions to get any state pension payments at all, but this doesn’t have to be from ten years working in a row.
If you have any gaps in your career, you may have paid less national insurance and would receive a smaller state pension to reflect that.
It is possible to make voluntary national insurance contributions to top up your record, usually from the previous six years.
How much is the state pension?
Those claiming the full flat rate state pension now receive £203.85 a week, equal to £10,600 a year.
You can spend the money as you wish, but it is treated as income so you may have to pay tax on it if your total earnings are above the annual personal tax allowance, currently £12,570.
Retirees can start to claim the state pension at 66, though if you’re retiring after 2026 it’s likely that the minimum age will rise to 67.
How to save for retirement
Anyone planning their retirement needs to do some careful calculations about how much they will need to afford the lifestyle they want.
A good starting point is the Government state pension age calculator, which will tell you at what age you will receive your state pension.
Pension calculators can also help you work out how much money you need to be saving to have the pension pot you want at retirement.
The earlier you start saving, the easier it is as your money has longer to grow.
And you’re not on your own when it comes to saving for retirement.
Your workplace will almost certainly contribute some money to your pension pot too, and you get tax relief from the government which reduces the amount you have to pay in yourself.
