How much do I need to save for retirement?

Pensions UK has updated its Retirement Living Standards¹, providing the latest estimates of how much retirees need to spend each year to maintain different lifestyles.  

The figures suggest a moderate lifestyle would now cost a single person £32,700 a year and a couple £45,400 a year. This assumes they own their home outright.

In this article, we crunch the data to help you understand how much money you’ll need for different retirement lifestyles and offer practical tips to help boost your pension savings.

How much does retirement cost?

To work out how much you need to save, it’s helpful to have an idea of what your retirement might cost.

Pensions UK has defined three ‘retirement living standards’ – minimum, moderate and comfortable – and calculated how much retirees would need to spend to achieve those standards. Each standard represents a different level of financial security and lifestyle:

• Minimum lifestyle: covers all your basic needs with a little extra for fun.

• Moderate lifestyle: provides more financial flexibility, including an annual foreign holiday.

• Comfortable lifestyle: allows for a more spontaneous lifestyle, with several UK minibreaks and a foreign holiday each year.

The table below shows our calculations of how much a 66-year-old retiring today would need in pension savings to fund each living standard until age 100. Not many people will live to 100, so this may not be appropriate for everyone, but underestimating your life expectancy could mean your pension runs out too quickly.

Our calculations assume:

• each individual qualifies for the full State Pension, which is currently £12,548 a year

• their pension income is taxed at the basic rate of income tax (20%)

Pension pot needed to achieve each standard of living in retirement

*Minimum standard of living is covered by two lots of State Pension (£12,548 x 2 = £25,096).

Notes: Assumes the State Pension rises by 2.5% a year; the required spend increases by 2% a year to account for inflation; average annual investment growth is 5% after costs; and the full State Pension is the investor’s only other source of taxable income. The investor withdraws their 25% tax-free cash (capped at £268,275) gradually over time rather than upfront.                             

Source: Pensions UK and Vanguard.

Bear in mind that Pension UK’s figures are based on averages and won’t necessarily reflect your own circumstances. You could find your spending starts off high as you enjoy your newfound freedom, falls as you get older and then rises again if you need to pay for long-term care. Nevertheless, having a benchmark can help you set a clear savings goal.

How to boost your retirement savings

If you’re concerned about a shortfall in your pension pot, there are several ways to help boost your savings.

1. Start as early as you can

The earlier you start saving, the better.

We calculated how much someone would need to save if they wanted £500,000 in pension savings by age 66. That would be enough to fund a moderate retirement using the assumptions above.

Our calculations assume:

• the investor contributes 5% of their salary to a workplace pension²

• their salary increases by 3% a year

• they also contribute to a low-cost self-invested personal pension (SIPP)

• their investments grow by 5% a year after costs

We found that:

• a 25-year-old earning £30,000 a year would need to invest £72 a month into their SIPP

• a 50-year-old earning £60,000 a year, with £100,000 already saved, would need to invest £434 a month into their SIPP

In both cases, these are the amounts the individual would need to pay into their SIPP each month. Tax relief would then be added to their contribution. These amounts are in addition to the 5% of salary being paid into a workplace pension.

2. Increase your pension contributions

Topping up your pension – whether that’s by increasing your monthly contributions or adding a lump sum – could make a big difference to the size of your pot at retirement.

This is partly thanks to the tax relief you get on personal pension contributions. For every £80 you contribute to your pension, you’ll get a top-up of £20. If you’re a higher-rate or additional-rate taxpayer, you can claim back an additional £20 or £25, respectively, via your self-assessment tax return.

3. Cut the cost of investing

Pension fees vary from one provider to another and can have a significant impact on the value of your retirement savings over time.

One way to potentially reduce investment charges is to consolidate your pensions with a low-cost provider. That means bringing together all your different pension plans into one pot, such as a Vanguard Personal Pension.

As well as lower fees, consolidating your pensions can cut down on admin and make it easier to see whether you’re on track to achieve your savings goal.

However, it may not always be in your interests to transfer out of a pension, particularly if you have a defined benefit (DB) pension or any other guarantees³. If in doubt, it’s always worth seeking financial advice.

While everyone’s retirement will look different, understanding what different lifestyles may cost can help you set realistic savings goals. Reviewing your pensions, checking the charges you’re paying and increasing your contributions could all help improve your chances of achieving the retirement you want.

¹ Retirement Living Standards, Pensions UK.

² We assumed minimum auto-enrolment of 8% of salary between £6,420 and £50,270.

³ These pay a guaranteed income depending on your final or average salary and are funded by employers. In general, DB pensions are usually not suitable for consolidation.

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