How to build a better pension in your 20s, 40s and even 60s

Dreams of a comfortable retirement are fading fast for millions of hard-working savers as new figures reveal the cost of maintaining even a frugal lifestyle rose almost 20 per cent last year. 

The soaring cost of living, up another 10.5 per cent last month, takes its toll on everyone’s budgets – but especially on those in retirement. 

Maintaining a minimum standard of living in retirement now costs £12,800 – up from £10,900 last year. A comfortable retirement costs £37,300 – up by £3,700, according to industry body the Pensions and Lifetime Savings Association. (Read our full report on how much you need for a decent retirement.)

That comfortable income would pay for a lifestyle that includes, for example, three weeks of holidays in Europe every year, a replacement kitchen and bathroom every ten to 15 years and a two-year-old car replaced every five years. 

Planning ahead: Dreams of a comfortable retirement are fading fast for millions of hard-working savers

How much money do you need in your pension pot? 

Although a comfortable retirement costs £37,300, you would only need to find £26,700 a year because a full state pension – if you are eligible – should cover the first £10,600. 

To achieve this income you would need a pension pot of around £645,000, according to calculations by wealth manager Quilter. A couple would need a bit less than twice that sum as many costs will be shared. The figures assume that you own your home outright – you will need a higher income if you are paying rent or a mortgage. 

For a minimum lifestyle you would need a pension pot of around £44,000 as the bulk of the £12,800 would be covered by the state pension. This would allow for a week’s holiday in the UK every year, eating out about once a month and some affordable leisure activities. It would not include the budget to run a car. 

For many people, such sums will feel far out of reach. But there are steps you can take at every age to make the retirement lifestyle you want a reality. 

Retirement income needs for single people. Scroll down to find out what couples require for a decent old age (Source PLSA)

How to build a pension… in your 20s 

At this age, retirement is so far off that it can be tempting to put off saving for it. However, the money that you save early on in your career is several times more valuable than money set aside later on. That’s because thanks to the power of compounding, your money has longer to grow. So it’s worth getting into the habit as early as you can. 

Luckily there is a lot of help available. Unless you specifically opt out, you will be automatically enrolled into your workplace pension. Your employer is required by law to put in the equivalent of at least three per cent of your salary every year and you must contribute at least five per cent. 

Put in more if you can. Money put into a pension is tax free, with 25 per cent tax relief bumping contributions back up to the point before 20 per cent basic rate income tax was charged. Higher rate taxpayers can claim back more from HMRC.

> How pensions work: Our guide to the essentials you need to know 

To work out how much you should be saving, a common rule of thumb suggests you should save a percentage equivalent to half your age when you start putting money aside. So, if you are 26, you should save 13 per cent of your salary. 

However, this assumes that you work solidly until retirement age. There is a good chance you’ll have gaps – to have children, travel, retrain or for illness – so save more whenever you can to allow for times when you can’t. 

You can afford to take a lot of risk with your investments as you are still decades off needing to spend them. Higher risk tends to mean greater rewards over the long term. Investing in one or several funds that invest in hundreds or thousands of companies all around the world is usually a good starting point. 

Finally, bear in mind that by the time you come to retire, the provision for older people may not be as generous as it is now. 

It would be nice to think that the state retirement age would be no higher and the state pension as generous as it is now, but that’s not a given. Plan to rely on yourself as far as you can.

How to build a pension… in your 30s 

Your expenses are likely to grow in this decade – especially if you’re saving to get on to the property ladder or have children. 

It can be tempting to dial back pension saving when things get tighter, but don’t give up if you can. It may feel selfish saving for old age when you could be spending on your family now, but they will thank you for not being financially dependent on them in the years to come. 

If you manage to pay off a student loan, consider diverting what you were spending into your pension instead. Do it before you get used to the additional income. 

Make sure that you claim National Insurance credits if you take time out of the workplace to look after children or relatives. It will help you to get a full state pension later on.

How to build a pension… in your 40s 

This is often the decade when your earnings really rise as you move up the career ladder. 

When you get a pay rise or bonus, try to divert some into your pension before you get used to having the extra money. 

If you are employed, you could consider asking for a pension rise. Not all employers will say yes, but some may agree to match a higher percentage of your pension contributions. By this stage in your career, you are likely to have several pensions. Try to keep track of them all by notifying all your providers of your new address if you move home or your name if you change it. 

You can track down old ones using the Government’s pension tracing service at gov.uk/find-pension-contact-details.

How to build a pension… in your 50s 

At the age of 55 (rising to 57 from 2028) you will be able to access your pension pots for the first time. You will also be allowed to withdraw up to 25 per cent tax free. However, you are better off leaving your pots untouched unless you need them straightaway. That way they have longer to grow. 

Once you have taken money from a pension, the maximum you can save into one tax free drops from £40,000 to £4,000 a year. So if you are still contributing to a pension, try not to make withdrawals. 

Get a forecast of how much state pension you are likely to receive. If you are not on track for the full amount, see if there are missing National Insurance credits that you are due. To check, get in touch with Revenue & Customs, call 0345 300 3900.

How to build a pension… in your 60s 

It’s not too late to boost your pension. You can still benefit from tax relief and employer contributions. 

You may want to move some of your pension pot into lower risk funds. However, if you have some pension savings that you hope not to touch for many years, you could keep them in higher-risk funds. 

If you do not have enough National Insurance credits for a full state pension, you may be able to buy missing years. Read our pension columnist Steve Webb’s essential guide to pension top-ups and whether they are worth buying. To find out more on how to do it go to  gov.uk/ national-insurance-credits

If you are providing free childcare to grandchildren under the age of 12, you may be able to claim National Insurance credits for this too. You can even backdate claims by ten years if you didn’t claim at the time. 

This post first appeared on Dailymail.co.uk