A question often asked is ….How much do I need to retire comfortably?
Many people are unsure how much they will need in their pension pots in order to provide for a comfortable retirement. Some believe that they will need the equivalent to their current wage, although between half and two thirds of the final salary is also considered sufficient, as their mortgage will have been paid off and the children will have left home.
The key questions are:
How much income money will I need in retirement?
How much money will I need to save in advance to deliver that income?
Which? Money has surveyed more than 6,000 retirees to find out what their spending habits are in order to answer these questions.
How much do people spend in retirement?
Retirees in their survey spent around £2,220 a month per household.
To help figure out how much you need in retirement, they have spoken to thousands of retired Which? members to see where their money is being spent. Households spent a shade under £2,220 a month, or around £27,000 a year, on average when they carried out research in 2019. This covers all the basic areas of expenditure (which had a combined cost of £17,800 per year on average) and some luxuries, such as European holidays, hobbies and eating out. Aiming for this level of income will provide a good platform for your retirement. You’d need £42,000 a year if you include luxuries such as long-haul trips and a new car every five years. Travelling and holidays are a very important part of retirement for our members, with people spending nearly £4,800 a year on this part of their life. Priorities change slightly as you move through your retirement years. Their members tend to spend relatively less on food and drink, housing payments and recreation as they get older, but more on utility bills, health, and insurance premiums.
Average annual spending for retired single people
The charts below show annual spending for a single person. They have highlighted three levels of spending – paying for essentials, funding a comfortable retirement, allowing a few extras, and being able to have a more luxurious lifestyle.
Essential lifestyle
Comfortable lifestyle
Luxurious lifestyle
So a luxurious retirement will involve a £33,000 spend.
A comfortable retirement will cost £20,000.
How much money will you need in your pension pot?
It's important to think about your pension income in building blocks - first with the state pension, then with your private or workplace pension savings, and then with any other additional income you might get, from investments or property.
State Pension
Once you reach state retirement age, currently 66 for men and women, the government will provide a sizeable chunk of your post-retirement money. The state pension is currently £258.40 per week for a couple (if you qualify for it before 6 April 2016). This is equivalent to £13,437 a year, bringing a couple halfway towards the £27,000 annual income level (before tax). The full level of new state pension (for people qualifying for it on or after 6 April 2016) in 2019/20 is £168.60 per week, but not everyone gets that much. You can find out why in our guide to how much state pension will I get? In April 2018, the average for a man who qualified after April 2016 was £151.84 a week (£7,895 a year), while the average for a woman was £143.85 (£7,480) a year. Combined, that's around £15,375 a year.
Final salary pensions
How much extra income you need to generate from your private pension savings will depend on the type of private pension you have. Defined benefit and final salary pensions pay you a regular monthly income - how much you get is based on your earnings while you were working. If you have one or more of these, you should receive annual updates telling you how much you can expect to get. Adding that to your state pension (which you can find out by getting a state pension forecast) will help you understand how much you've got to play with in retirement.
Money purchase pensions
A money purchase, or defined contribution, pension sees you invest your pension contributions into a big pot. When you come to retire, you have to decide how to generate an income from it. You can take your entire pension pots in one go, but this will mean it’s entirely down to you to make the money last and you’ll invariably pay a substantial tax bill. Most people with these pensions will opt for income drawdown or an annuity, or a combination of both when it comes taking money out of their pension. If this is you, how much will you need in your pension pot to have enough in retirement? They have crunched the numbers.
If you were looking to get a comfortable post-tax income of £27,000 a year and wanted to get a guaranteed income paid to you via a joint-life annuity, you'd need a pot of £298,000, according to their calculations. This also factors in the state pension. To get the same amount from income drawdown, which sees you keeping your money invested in your pension and withdrawing a regular income, you’d need £215,450. This assumes your savings grow by 3% annually. Producing post-tax annual income of £42,000, including the state pension. (For a married couple this would mean an initial pot of around £695,000 to buy a joint-life annuity or £502,775 invested in income drawdown.)
How much do I need to save into a pension at different ages?
If you wait until you are 40 to begin saving for the future, you'll need to contribute £489 per month to achieve a comfortable retirement by the time you reach state pension age. The figure rises to £1,142 per month if you are aiming for a luxurious lifestyle. The projections contain some quite scary numbers, although saving a few hundred pounds per month from your mid-20s is obviously more palatable than having to find much more if you leave your retirement saving until later in life.
Your monthly income should rise as you move through the decades and if you are in a company pension scheme, your employer will be contributing some towards your target amount. Under the rules of pension auto-enrolment auto-enrolment, a minimum of 8% must be paid into your pension, with 5% coming from you and 3% coming from your employer. Someone earning the UK average salary of £28,000 will be saving £186 per month. The more you can contribute, or find an employer that matches your contribution or more, the closer you'll get to these targets. The reassuring thing is that although you may not be saving at the above levels in your 20s or 30s, you’d have kicked off your retirement saving, and won’t have to start saving from scratch in your 40s and 50s.
Pension tax relief - free government money
When you save into a pension during your working life, the government likes to give you a bonus as a way of rewarding you for saving for your future. This comes in the form of tax relief.
When you earn tax relief on your pension, some of the money that you would have paid in tax on your earnings goes into your pension pot rather than to the government.
Tax relief is paid on your pension contributions at the highest rate of income tax you pay. So:
Basic-rate taxpayers get 20% pension tax relief
Higher-rate taxpayers can claim 40% pension tax relief
Additional-rate taxpayers can claim 45% pension tax relief
Things work slightly differently in Scotland.
Source: Which?