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?
The level of income you’ll need in retirement mostly depends on the lifestyle you hope to have when you retire.
Most people’s expectations are based on their income and lifestyle before retirement, so a general rule is to aim for an income of around two thirds of what you earned at work. Typically, you won’t need as much in retirement because you’re less likely to face costs for things like commuting, national insurance, or a mortgage.
The Pensions and Lifetime Savings Association (a not-for-profit organisation) publishes annual estimates for ‘retirement livings standards’ at three levels of income: ‘minimum,’ ‘moderate,’ and ‘comfortable.’ Here are their estimates for 2023:
| Minimum annual income | Moderate annual income | Comfortable annual income | |
|---|---|---|---|
| Single person | £12,800 | £23,300 | £37,300 |
| Couple | £19,900 | £34,000 | £54,500 |
Visit the Pensions and Lifetime Savings Association website to learn more about retirement living standards.
So how much might you need to save?
In April 2019 the minimum contributions to auto-enrolment workplace pensions were raised to 8% of earnings, including what the employer puts in and tax relief from the government. But we think even this is unlikely to give people the pension pot they’d need for a comfortable retirement.
To help close the gap, we’re calling on the government to increase the minimum to 12.5% by 2028.
Your personal situation
12.5% of earnings is our general recommendation, but the actual amount you’ll need to save depends on your own situation. For example:
- When you start: The earlier you start, the less you'll need to save each month.
- Existing retirement savings: If you’ve already got some pension savings you may not have to save as much as someone who’s yet to start.
- Your State Pension entitlement: The new State Pension currently pays a maximum amount of £221.20 a week for 2024/2025 to people with 35 years’ worth of National Insurance contributions or credits.
- The income and lifestyle you want in retirement: Clearly, the higher your desired income, the more you’ll need to save.
- When you plan to retire: The earlier you plan to stop working, the more you need to save. And the later you plan to stop, the less you’re likely to need.
- How much risk you’re prepared to take: In general, people who take more investment risk can expect higher returns on their savings, so they may be able to get away with saving a bit less. But higher-risk investments don’t always lead to higher returns, and a fall in the value of your pot close to retirement may force you to save a lot more, work for longer or leave you short.
Always remember, investment values can fall as well as rise, so you could get back less than has been paid in. Tax benefits depend on individual circumstances and are subject to change.
What’s your magic number?
The easiest way to get an estimate of what you should actually be saving is to carry out some scenario planning of your own. In a few easy steps our retirement planner tool lets you:
- Get an idea of what your income might be in retirement
- See what the difference may be if you were to use a flexible income (drawdown), a guaranteed income (annuity), or withdraw your pension(s) as cash
- Adjust the amount depending on retirement age and amount paid into your pension
Before you use an online planner like this, it makes sense to gather details of all your existing pensions and get an up-to-date State Pension forecast.
If you’d like help with your investments, you can get tailored financial advice from one of our advisors or find an independent financial advisor on unbiased.co.uk. Remember you might be charged for any financial advice you receive.
