Retirees receive £119,000 less in pension savings than expected

UK retirees are facing smaller pension pots than expected, with more than half of adults regretting not having started saving earlier in their careers

Retirees pension pots with red background and broken piggy
(Image credit: Getty Images)

Retirees are grappling with smaller pension pots than anticipated, according to new research. 

Standard Life’s Retirement Voice Report reveals a concerning trend: retirees are averaging just £131,000 in their pension pots – a deficit of £119,000 for those who had set their sights on a nest egg worth a quarter of a million pounds. 

This dip could seriously cramp pensioners’ retirement style. If you look at current annuity rates, having a pension pot of £250,000 means that your monthly income would stand at £1,007, or £12,091 annually. This is if you retire at 66. 

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But now, with a pension pot of £131,000, retirees will be looking at just £527 a month, or £6,332 in a year. This is £480 less monthly or £5,759 yearly. 

It is a long way from the comfortable retirement that many retirees aspire to have.

Even when you factor in a full state pension, a £131,000 nest egg still falls short of providing a “moderate standard of living”, which the Pensions and Lifetime Savings Association (PLSA) says retirees need £31,300 a year to be able to fund.

While these numbers paint a bleak picture, it’s not the only source of worry for those approaching retirement. Despite chancellor Jeremy Hunt upping the annual pension contribution allowance to £60,000 in the new tax year, few retirees are able to capitalise on its benefits due to challenges posed by the rising cost of living. In some cases, people are even choosing to ‘unretire’ to bolster their pension savings.

The report also uncovered regrets among retirees about their pension savings, with at least 50% expressing remorse for not having planned their retirement finances in their younger years, saved more diligently or started saving earlier in life. 

Dean Butler, managing director for retail direct at Standard Life, said: “It can be hard to work out how much you need to save to achieve your desired standard of living in retirement, particularly earlier on in your career. It’s even harder to stick to it, as everyday expenses and those one-off costs that come up in life constantly threaten to move long-term saving down the priority list.”

Butler points out that the substantial gap between what people hope to save and what they do is “unsurprising”, particularly when looking at it during a cost of living crisis. But what it results in is a “significantly reduced standard of living in retirement”.

How to boost your pension savings 

First things first, it’s worth knowing that the lifetime pension allowance has been axed, and you can still take advantage of pension tax relief to improve your golden years. 

With a new tax year came new tax changes, so you may be thinking of ways to maximise pension contributions or reduce your tax bill in hopes of shielding your money from the taxman. 

To close the gap and reach your desired retirement pot, Butler acknowledges that it can be challenging to “know what to aim for and when to prioritise long-term saving over more immediate priorities”. 

Here are some steps you can take to increase pension contributions and make the most of your money: 

Maximise your employer contributions 

Topping up your pension contributions by just 2% of your salary could boost your pension pot by £108,000 in retirement, according to Standard Life. 

For example, those aged 22 earning £25,000 per year can accumulate a pot of £542,000 by 66 if they paid the standard monthly auto-enrolment contribution of 3% and increased it to 5%. Go even further and your pension pot could be worth over £1 million

Even if you’re only in a position where you can afford to increase your pension contributions by just 1%, make sure to take advantage of that. It could lead to a huge difference in your later years.  

Some employers match your contributions up to a certain amount, so if you pay in more, they will also add some extra cash. It’s worth asking your boss or HR manager if you’re unsure about their pension policy.

Sacrifice your bonus for a pension boost 

If you are getting a bonus this year at work, it may be worth considering giving it up (or some of it) to your pension instead. 

How this works is that instead of your bonus being paid into your bank account alongside your income, it will instead be put into your pension pot. 

Not only does this allow you to make your money go a long way but you can also benefit from tax relief, paying less National Insurance and potentially boosting your child benefit.

The only catch to doing this is that you won’t be able to instantly reap the benefits of your bonus. So if you were planning to go on a holiday, or climb up the property ladder, it may become difficult to do so. 

Use your pension allowance 

Try to make the most of your pension annual allowance. This is the maximum amount that you can contribute to all your pension schemes in a tax year without getting penalised. 

The limit stands at £60,000 or 100% of your earnings in a tax year, whichever is less. 

However, this may differ if you’re a high earner and your annual taxable income exceeds £260,000 as you won’t be entitled to the full allowance. 

Start strong with the new tax year 

Even if you top up your pensions a little bit it could really pay off down the road, especially if you’re starting out early. 

Think about bumping up your pensions whenever you get a raise or have some extra cash to hand, especially at the start of a new tax year or if you don’t need any immediate cash soon. 

Butler advises people to give their pension savings a refresh and put themselves in the “best financial position possible for the future”. He says: “It can be easy to leave it until tax year-end looms once again, but if you are in a position to act sooner, consider putting money away earlier in the financial year. 

“The longer you are invested the greater potential for growth and with the potential benefits of compound investment growth, it all adds up, giving your savings a boost that can add real value to your pension and make a meaningful impact on your retirement.”

Oojal Dhanjal
Staff writer

Oojal has a background in consumer journalism and is interested in helping people make the most of their money. Before joining MoneyWeek, she worked for Look After My Bills, a personal finance website where she covered guides on household bills and money-saving deals. Her bylines can be found on Newsquest, Voice Wales, DIVA and Sony Music and she has explored subjects ranging from luxury real estate to the cost of living, politics and LGBTQIA+ issues. Outside of work, Oojal enjoys travelling, going to the movies and learning Spanish with a little green owl.