Crunching the numbers on how much you need for the retirement you want

Rising prices for food, essentials and leisure have hiked what people need from their pensions in retirement, according to the latest Retirement Living Standards from Pensions UK.

A ‘comfortable’ lifestyle is now priced at £45,400 a year for a single person, with the ‘moderate’ and ‘minimum’ lifestyles coming in at an annual cost of £32,700 and £13,900 respectively.

Although 82% of people are expected to achieve the minimum standard, only 23% will move further up the ladder, meanwhile, just 9% are expected to achieve a ‘comfortable’ retirement, which could require a pension pot of up to £845,000, alongside a full state pension.

The recent Pensions Commission report has identified that 15 million people are under saving for retirement but being told you need £500,000 saved for even a moderate standard of living in retirement can be overwhelming.

The role of pensions hasn't changed, but the amounts you need in them have

Pension savings are ultimately there to pay us an income when the times comes to retire, but the shift from pension promises to pots can sometimes leave people scratching their head at how much they need to put away. 

The Pensions UK figures can help people crunching the numbers to work out what they’ll need to get by, depending on how they want their retirement to look.

But sticky inflation baked into the record price hikes we saw in the early 2020s means the pension pot values required to generate those incomes have also soared, and some people are likely to find themselves behind.

Automatic enrolment has been successful in getting more people saving into a pension in the first place, for anyone getting just minimum contributions is particularly at risk of their savings not meeting their retirement expectations. The same goes for people who intend to rely on little more than the state pension alone, including many self-employed people. 

Without taking control of their pension pots, increasing contributions and making the most of the tax perks on offer, those currently saving for retirement will be forced to choose between working far longer or living on a pittance in their later years.

What are the Pensions UK Retirement Living Standards?

The standards are designed to give a guide based on various assumptions on what retirees will spend at three different levels: minimum (covering the basic essentials), moderate and comfortable. 

Each level uses a range of common goods and services to calculate an income figure, after tax. For example, the moderate living standard allows for some help with DIY, a used car replaced every seven years and one two-week holiday abroad together with a UK mini-break every year.

It also allows for takeaways and eating out a couple of times a month as well as money to spend on clothing and personal items. But none of the standards assume housing costs, which might reflect retired life for those becoming mortgage free, while others may continue to rent or face paying their mortgage even as they start accessing their pension.

It’s therefore important to remember that the costs and income needed will vary significantly depending on location and personal circumstances.

How much do you need to save towards retirement?

The state pension should cover the cost of the minimum standard of living for a two-person household at state pension age, which is currently 67. 

But the ‘single tax’ still rings true in retirement, meaning those wanting to get by at the minimum level with no car or foreign holidays in a one-person household will still need to have some pension savings of their own.

It’s no surprise that the earlier you start pension saving, the less you need start to put away, thanks to the power of time and compounding. We’ve pulled together what contributions are needed to achieve the pension pots quoted by Pensions UK, based on the average existing pension pot at each of those ages, according to the ONS.

The costs are significantly lower for a two-person household (at an individual level) able to combine pension pots, but the figures for a one-person household might leave those expecting a decent standard of living in retirement with a shortfall unless they take action.

A 30-year-old earning £37,000 could build a pension pot of over £437,000 by age 67, putting themselves in the moderate lifestyle bracket by contributing 8% of their salary assuming their employer also adds 3%. This £247 per month starting figure assumes they already have £19,000 in pension savings, achieve 5% annual investment growth before charges of 0.6%, and receive 3% pay rises each year. The figures are also adjusted for 2% inflation.

Someone age 40 with an existing pot of £39,500, would need to begin paying in 11% of a £48,000 salary, equivalent to a starting amount of £440 per month to get to the same pot value.

This also assumes the same 5% growth rate for investments before charges, a 3% employer contribution, 3% earnings growth and 2% inflation.

Leaving the catching up until age 50 and starting from an £80,000 existing pot means a higher mountain to climb and higher pension contributions. To get to a moderate living standard at state pension age would require personal contributions of 18% based on a £58,000 salary and the same growth and inflation assumptions, alongside a 3% employer contribution to complement the £870 monthly personal contribution.

These personal contribution figures rise to a whopping 16% (£493 per month), 22% (£880 per month) and 35% (£1,692 per month) of the respective salaries for our three age groups to get over £700,000 and into the pot range required for a comfortable living standard. Clearly the contribution from a worker could be lower if an employer paid in more than just 3%, but this also highlights that stark reality for self-employed people, who will not benefit from an employer top up.

What can you do to boost your own pension savings?

The key to reaching your retirement target relies on you taking control of your pension savings and knowing what action you need to take as early as possible.

Work place pension hacks

Although a workplace pension comes with minimum contributions, it’s worth checking with your employer if they will match any extra money that you pay in, up to a certain level. Many employers do offer some kind of matching, and you could be missing out on extra ‘free money’ as anything on offer won’t to be diverted to you as extra pay instead.

With over £31 billion in the UK thought to be in lost pensions (source: Pensions Policy Institute), and people in the UK having multiple different jobs with different employers throughout their careers, it’s vital to check you’ve not lost track of any old workplace pots

Many providers, including AJ Bell, offer a free pension finding service which allows you to combine your pots in one place, which can result in easier administration as well as lower costs, meaning your pension keeps more of your investment returns over the long term.

What about if you're self employed?

If you work for yourself, you won’t be automatically entered into a workplace pension scheme, but you can still save for your retirement and lower the cost of saving thanks to pension tax relief. If you own a limited company, you could also consider paying part of your earnings directly into your pension as an employer contribution. 

This can have the added benefits of reducing your business’ liability for corporation tax and your personal liability for income tax, saving tax while boosting your retirement pot.