How much do you need to save in your pension?

Setting yourself up for retirement is one of life's biggest goals, and one of the hardest to plan for.

It's impossible to know exactly how much you’ll need in retirement, because you can’t anticipate every life event or how inflation might change prices by the time you get there. However, having a number in mind can be a helpful goal to aim for, even if we can’t be sure of the exact amount. Pensions UK has provided estimates of what they find Brits often need, split by different lifestyles.

According to the Pensions UK, a single retiree is expected to need an income of £31,900 each year for a moderate lifestyle, and £43,900 each year for a comfortable lifestyle. Those with a minimum lifestyle are anticipated to spend about £13,400 per year. Remember, these projections are based on this year. So, if your retirement date is still some way off, you’ll likely face higher costs due to inflation.

Some of this retirement income may be provided through the state pension, which pays up to £11,975 per year per person. If you are living a minimum lifestyle as a couple, Pensions UK believes the full state pension will currently cover your retirement needs. For any other situation, such as wanting a more comfortable lifestyle or if you are single retiree, you will need your personal pension pot to cover some of the expenses.

For those wanting a comfortable lifestyle, Pensions UK estimates a single person would need a pension pot of between £540,000 and £800,000 to purchase an adequate annuity, while a couple would need £300,000 to £490,000 in their pension pots each. A moderate lifestyle would require £330,000 to £490,000 for a single person, and £165,000 to £250,000 for each member of a couple.

Are you saving enough?

Being told you need to build a pension pot worth £500,000 plus to enjoy a comfortable standard of living in retirement might feel intimidating. The key is to focus on saving as much as you can afford from as early as possible, taking advantage of incentives like employer contributions, tax relief and tax-free investment growth.

To get an idea of if you are on track with your contributions, you can use AJ Bell’s pension calculator. This allows you to input your salary, contribution levels, when you plan to retire, and other factors to create an estimate of what your pot will look like by retirement age. It also factors in an inflation rate of 2% and, for any regular contributions, an increase in line with earnings inflation of 3% a year.

How to use the calculator

Let’s say an investor, Anne, is 30 now and plans to retire at 65. So far, she’s saved £15,000 into her pension pot. She makes £80,000 a year and contributes 8% to her pension while her employer contributes 3%. Using the pension calculator, Anne can see that her pension will grow to over £796,000 by the time she’d like to retire, assuming a 5% annual investment return.

Once Anne has this information, she can assess more clearly if she believes this amount will be enough. If not, she can adjust the figures on the calculator until she gets to the amount she's aiming for. If the new contribution levels are doable, then she can adjust the contributions and risk levels of her actual pension accordingly.

If you are in the early stages of your career, remember that you will likely need a much higher amount than the numbers currently listed by Pensions UK. But this method can help create an estimate of what you are on track for.

Is automatic enrolment enough?

Automatic enrolment has been successful in boosting pensions participation in the UK, but the harsh reality is that anyone on minimum contributions – currently set at 8% of earnings between £6,240 and £50,270 (5% from the employee and 3% from the employer)– is at risk of falling well short of their retirement expectations. The big danger here is that, without scaling up their minimum contributions, millions of people will sleepwalk into a retirement shock and be forced to choose between working longer or living on less money in their later years.

What does a ‘comfortable’ versus ‘moderate’ lifestyle mean?

The Retirement Living Standards are designed to provide a very rough guide to how much a ‘minimum’, ‘moderate’ and ‘comfortable’ retirement lifestyle might cost. They 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.

For example, the minimum living standard assumes one week-long UK holiday per year. By contrast, the moderate living standard assumes a fortnight three-star all-inclusive holiday in the Mediterranean and a long weekend break in the UK. The comfortable living standard, meanwhile, budgets for a fortnight four-star holiday in the Mediterranean with spending money and three long weekend breaks in the UK. It’s important to note that all the living standards assume no rental or mortgage costs.

If you don’t feel that the Pensions UK data is a good fit for your lifestyle, you can also create an estimate yourself. Have a look at what you are spending on a month-to-month basis now and consider which of those costs you will no longer have in retirement. For example, you may save on commuting expenses, or you might have paid off your mortgage by then. Add in any new costs you think you might have, like an extra holiday each year, or perhaps additional medical and care expenses.