How much should you save for retirement?

The majority of people under-save for retirement, but how much do you need for a comfortable life after work and what should you pay into your pot?

Your pension pot is one of your biggest investments, but is it enough to get you the lifestyle you want when you stop working?  

Most people do not save enough, and according to a new report from Now: Pensions and the Pensions Policy Institute, “underpensioned” groups mostly include single mothers (who are also missing out on state pensions), the self-employed, carers, people with disabilities, and ethnic minorities – who have private pension incomes that range from 18% to 64% lower than the UK average UK saver.  

These underpensioned groups are reaching retirement with private pension incomes of just £2,850. Around 8.6 million people are now missing out on workplace pension savings.  

The underpensioned index revealed the pensions savings gap for some of the most financially at-risk groups has worsened since the first index was published in 2020.  

The average annual income for women is currently 80% of the UK average, and 67% of men’s average. For single mothers that figure drops to just 60% of the UK average. Divorced women, people from ethnic minority backgrounds and people with disabilities have all seen their private pension incomes decline compared to the population average since 2012.  

The gaps are exacerbated by the fact 8.6 million people in the underpensioned groups are locked out of auto-enrolment and miss out on savings. To qualify for auto enrolment, you need to be at least 22 and earn over £10,000 a year. Part-time workers can sometimes miss out. 

We take a look at exactly how much you should save for retirement and how much you should put away to get the lifestyle you want.  

How much pension do I need to save? 

When thinking about how much you need to save for retirement, some of the things you should think about are:  

  • The type of retirement lifestyle that you want. 
  • Whether you’ll still be paying rent in retirement 
  • Longer lifespans mean your pension will need to last you longer 

“Most people want to retire on two-thirds of their current salary,” says Samantha Gould, head of campaigns at NOW: Pensions. The average UK salary is £38,000. This amount falls within the “moderate” category outlined by the Pensions and Lifetime Savings Association (PLSA), which has outlined the amount of savings you need based on the type of retirement that you want to enjoy.  

  • Minimum: a single person would need £10,900 a year while a couple would need £16,700. According to the PLSA this would cover all your needs with some left over for recreational activities. 
  • Moderate: a single person would need £20,800 and a couple would need £30,600, This offers more financial security and flexibility. 
  • Comfortable: £33,600 for a single person and £49,700 for a couple. This allows for more financial freedom, and some luxuries. 

It’s worth noting these amounts won’t work for everyone. You have to consider your individual circumstances and lifestyle. Equally, says Gould, if you are a woman you will need to save more.  

“In the UK, we have a gender pensions gap of over £137,000,” she says. “That is the difference in pension savings between men and women by the age of 65.”  

What about the state pension? 

“A common misconception is that the state pension can make up for shortfalls in personal pension saving,” says PensionBee CEO Romi Savova. “But in reality, the full state pension currently pays an annual income of just £9,627.80, which isn’t enough for a comfortable retirement.” 

The state pension should be factored into your final pot. But it’s only accessible from the age of 66 – and this will rise to 67 by 2028. Plus, to qualify for the full amount, most savers need 35 years’ National Insurance contributions. Some people will have gaps in employment for time taken out to take care for family, for instance.  

“Savers who pin their hopes on the state pension tend to have underestimated the overall cost of retirement,” Savova continues. “This is one of the worst mistakes to make as it could force savers into a difficult position, where they may have to return to work or sell assets to fund their later life.” 

How to plan when saving for retirement 

1. Sit down and crunch the numbers 

The best way to figure out how much you will need in retirement is to have a clear idea of how much you will need to cover your basic expenses, but also what you might want to do in retirement.  

“Once a saver has a clear target for their retirement income, they can adjust their pension contributions and plan accordingly to achieve this,” says Sovova.  

2. Boost your pension when you get a pay rise  

It’s a good idea to revisit your retirement planning throughout your working life, says Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown. “Boosting pension contributions whenever you get a pay rise for instance can mean that over time you end up contributing a lot more over the years which can really boost your final pot.” 

3. Keep track of old pension pots  

The Pensions Policy Institute estimates there is over £26bn of lost pension money, and the average value of a lost pension is over £9,000. This “can make a real difference to your planning”, says Morrissey. “It may make sense to consolidate old pensions into one so it makes it easier to keep track though it’s important to check you aren’t missing out on important benefits like guaranteed annuity rates by doing this.” 

4. The longer you invest for, the more compound interest you will benefit from 

“While it’s never too late to start saving, the earlier a saver starts, the longer their pension has to grow,” says Savova. “By leaving a pension untouched for several decades, a small savings pot is likely to turn into a much bigger pot at retirement thanks to compound interest.”  

Additionally if you’re able to increase your level of contribution, even by just one or two percent you could significantly boost your pension pot.  

Ways to save for retirement outside of a pension  

If you want to get creative about your retirement income, there are other things you can do.  

Isas 

Individual savings accounts (Isas) are becoming a popular alternative to private pensions due to their tax advantages. Having one alongside a pension could help boost your income in retirement.  

Lifetime Isas allow you to save up to £4,000 a year and the government tops it up with a 25% bonus, for instance (you must be aged between 18 and 39 to open a Lifetime Isa). Isas can also help you avoid breaching the pensions lifetime allowance.  

Property  

Investing in a buy-to-let property could also boost your income in retirement; however, you’d technically still be employed as you would be a landlord.  

Investment portfolios  

Investmenting in stocks and shares comes with risk (as do all investments), but doing your research into stocks or funds that pay handsome dividends could also help support your pension pot.  

“With so many different saving options available, it’s important for savers to research which financial products are best suited to their retirement goals,” says Savova.

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