How much do I need to retire?

Pensions help you save more towards your retirement, but how do you know if your savings are on track? I’m Charlene Young, senior pensions and savings expert at AJ Bell, and in this short video, we’ll look at how much you might need in your pensions to fund the retirement you want. 

Let’s start by working out how much your retirement might cost; this will largely depend on how much you will want to spend It is personal to you which can make it tricky to pin down. Some people like to target a fraction of what they spend now after tax. But there are handy resources out there that can help you. 

Research by the Pensions and Lifetime Savings Association – or the PLSA for short – look at the amounts needed to fund three different standards of living in retirement. They produce figures for people living alone, as well as for those living together. 

The minimum or basic standard covers the essentials, and then different amounts are assumed to be spent on goods and services, like food, holidays, household maintenance and clothing to get to the moderate and comfortable standard of living.

It’s important to note that all the living standards assume no rental or mortgage costs, but they do attempt to give a realistic estimate by assuming that everyone, including those targeting a ‘minimum’ standard of living, will want to enjoy a social life and the odd takeaway as well as paying essential bills. Most people in the UK will have some income from the State Pension. To get the full new State Pension, you’ll need to have built up 35 full qualifying years of national insurance contributions. This covers most, but not all, of the basic standard of living for a single person. If you’re aiming for a moderate lifestyle, the State Pension could cover nearly 40%. 

For a two-person household, your combined State Pensions could cover a basic standard of living, but only around 50% of that moderate lifestyle. It’s likely that you might want to wind down or even fully retire before you reach your state pension age. You’ll need to make sure your personal savings can cover you entirely until the State Pension kicks in, and leave enough to make up for any shortfalls once it does. You can go to the gov.uk website to get a state pension forecast and see if you’re on track for the full amount. 

Here’s where your own savings come in – whether that’s a workplace scheme, a personal pension, or investments in other types of accounts. Figures from consumer site Which? show that people aiming for a moderate retirement lifestyle will need between £300,000 and £400,000 in their own pot by the time they reach State Pension age. For the comfortable standard, it jumps to £500,000 to £600,000. If you’re in a couple and able to pool resources, this should mean a much lower target pension pot size between both of you. Of course, these are just estimates. Investment returns, inflation, and how long you live will all make a difference. 

Being told you need to build a large pension pot to enjoy a decent standard of living in retirement might feel intimidating. While automatic enrolment has been successful in getting more employees saving into pensions, those on the minimum contribution levels are at risk of falling well short of their retirement expectations. The key is to focus on saving what you can afford, whilst taking advantage of incentives like employer contributions, tax relief and tax-free investment growth on the investments in your pot. Check with your employer whether they offer to match your contributions.

For example, if you pay in 6%, they also pay in 6%, and so on. This valuable perk can give an extra boost to your savings. The earlier you can start, the more time your savings will have to grow. Someone saving £400 a month from age 30 could end up with over £400,000 by age 67. Wait until you’re age 50 to start, and you’d need around £1,350 a month to get there. This assumes a 4% annual growth rate after charges. You should also find out where your current pensions are. If you have had several different jobs, chances are that you’ve got pots spread across different pension providers. 

Tracking them down and combining them gives the chance to reduce charges and the benefit of having all your savings under one roof, making it easier to see if you are on track. Thank you for watching this video. If you’re interested in learning more about pensions, we’ve got other videos and guides online to help. For example, we look at how to claim tax relief on the money you pay into pensions and how you can access your pot when you’re think of retiring. See you soon!