If you’ve started a pension, you’ve already made a positive step towards saving for a brighter future.
But how much money should you be paying into it if you want a comfortable retirement?
Here are some ideas to help you plan for the future.
How much income will you need when you retire?
First things first, it’s worth considering how much you’ll actually need to live on when you finish working, because that directly affects how much you need to save.
On current estimates, the government has issued the following figures as a guide to how much of your current income you'll need to receive in retirement to help maintain your current standard of living:
- 70% of your current income if it’s between £12,200 and £22,400
- 67% of your current income if it’s between £22,400 and £32,000
- 60% of your current income if it’s between £32,000 and £51,300
- 50% of your current income if it’s over £51,300
The reason the amounts for retirement are less than your current earnings is that many of your everyday expenses won’t apply any more when you retire. For example, you won’t be commuting to work, you’re unlikely to have childcare costs, and with any luck you’ll have paid off your mortgage, too.
So if you earn the average UK salary of around £24,500, the guidelines suggest you’d need around 67% of that for a comfortable retirement. That works out as about £16,500 a year. Of course, your living costs may be more or less than the guidelines suggest, depending on your lifestyle. We’re all different, after all.
So how much might you need to save?
In truth, the answer to this depends largely on how soon you start. The earlier you begin saving, the less you’ll have to put away as a proportion of your income each month – and vice versa.
However, to give you a basic idea, we’ll look at approximately how much a 22-year-old earning the average UK salary of £24,500 might need to save for a retirement income of £16,500 when they reached 68.
How much might a 22-year-old need to save for a £16,500 income?
If their pension grew at a low rate (2% a year), they’d need to save £416 a month.
If their pension grew at a medium rate (5% a year), they’d need to save £162 a month.
And if their pension grew at a high rate (8% a year), they’d need to save £58 a month.
These figures take inflation and charges into account (2.5% and 0.75% a year respectively), and are based on a number of assumptions. The monthly savings required would also need to rise in line with inflation. And don’t forget – if you’re in a workplace pension, your employer may contribute as well, helping you to save.
It’s worth bearing in mind that annuity rates change over time, and can vary considerably from provider to provider. Whether or not you’d receive the full State Pension will depend on pension rules when you reach State Pension age and your individual circumstances.
And of course, the value of your pension investment is not guaranteed, it can go down as well as up and you could get back less than has been paid in.
Get a personalised answer
The figures above are designed to help you start thinking about how much to pay into your pension. But they’re just a basic example based on one person’s circumstances – which are unlikely to match your own.
If you’d like a more accurate idea of what you should be putting away, there are online calculators that can help you do this – such as our own retirement planner tool. Alternatively, you may want to speak to a financial adviser. Find a financial adviser near you at unbiased.co.uk.