Archived article: Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
How much money you need to save in your pension is an age-old question, and notoriously hard to answer.
Even those that are at retirement age aren’t able to perfectly estimate what they’ll need. There could be unexpected health issues, home expenses, or market volatility that you weren’t able to anticipate.
These numbers get even more vague when we try to project further into the future. It brings up a plethora of questions: Will the policies around retirement stay the same? At what age will people get the state pension, and how much will they receive? How much will inflation increase in this period? If you have more than 30 years until retirement, it’s going to be near impossible to make correct estimates on all these factors, and it’s led people to some startling conclusions on how much you’ll need.
Some recent estimates have suggested to Gen Z they need to save up a pot of more than £3 million. For most of us, this just isn’t possible. But there’s a very good chance that what you’ll really need is significantly less than that, and much more manageable.
How much might you need to save?
The amount needed for retirement will differ from person to person. But the Pensions and Lifetime Savings Association does set out figures each year for what they consider to be an average amount to live on. In their most recent findings, someone looking to have a ‘moderate’ lifestyle during retirement would need about £31,700 a year. In three or four decades from now, when Gen Z is retiring, it’s hard to say what that number would be. But for the sake of creating an estimate, we can see what happens if the amount needed grew by 2% each year, which is the Bank of England’s inflation target. However, inflation will likely go both above and below this amount during this time.
If someone is 25 now, and plans to retire at 60, by the time they are age 60 that yearly amount would be £63,396. If that inflation continued throughout a retirement that lasted 25 years, they would need £2,124,618. This is less than £3 million, but still an enormous sum. However, according to PLSA, about 70% of people retire with a two-person household. And this helps to bring down the amount required substantially, to a pot of £1,478,071 per person.
On top of this, you would also hopefully receive some support from the state pension. To be fair, this is one area where many have fears of policy changes. Right now, state pension begins at age 66, but it’s set to rise to 68 in coming years. It also is bound by the triple lock, which means that the state pension must rise each year by the same amount as either inflation, the percentage increase of average earnings, or 2.5%, whichever is highest.
There’s a lot of speculation that this will change. But if it continued, growing 2.5% each year, by the time an investor aged 25 was 68, it would be worth £34,620 each year. That would be a £392,294 boost to your pension, leaving one member of a couple with an estimated £1,085,777 to provide from their own pension pot.
Obviously, this isn’t a sum to be sniffed at. And it’s based on projections that we really can’t nail down. But it is significantly less than the £3 million sum, and much more achievable for investors. It’s also important to remember that your money can keep providing returns during retirement if it stays invested, so you might not need to retire with this full amount in your pot.
How far will automatic enrolment take me?
Let's say "Jane" begins contributing to their pension at age 25 through automatic enrolment on a £40,000 salary. The rules of automatic enrolment say that if you contribute 5% of your salary, your employer must contribute another 3%. This means that every month, £266.67 would be added to Jane’s pension. Assuming her salary rose by 2% each year, and her investment returns 7% before fees, she could have a pension pot worth £573,131 by age 60.
This certainly isn’t a bad start, but it may not afford Jane the sort of lifestyle she’s looking for at that time. Instead, she may need a contribution closer to £500 a month and the same 2% yearly increases, which would get her to £1,074,607 by retirement. Alternatively, Jane could choose to work to 65 instead of 60. Her automatic contributions would take her to £843,275 assuming the same market conditions, and she’d also have to save a slightly smaller retirement pot, because there would be less years that she would need to fund. Starting at £350 and working until 65 would take her to well over £1 million.
How can young workers prepare?
These sums are large and intimidating to take in, but they are not impossible. And it’s important to remember that for now, all we can do is estimate. But in any case, being as prepared as possible and starting the saving journey early can ease these concerns. Especially in early years, your pension is likely just one of a list of things you are saving for, competing with closer goals like a wedding or first home.
However, it also happens to be the most crucial years for pension contributions, and they come along with unique benefits like tax breaks. Having a look at what you can manage to contribute now could make a massive difference down the line.
Hannah Williford: Content Writer
Hannah joined AJ Bell in 2025 as an investment writer. She was previously a journalist at Portfolio Adviser Magazine, reporting on multi-asset, fixed income and equity funds, as well as macroeconomic impacts and regulatory changes...
