Pension planning: how much you need to save now for a comfortable retirement

The amount of money we need to set aside for a decent retirement has increased substantially.

That’s the conclusion of new data from the Pension and Lifetime Saving Association (PLSA), which identifies the sort of amounts needed for a minimum, moderate and comfortable retirement.

With the minimum level, it means that your needs are all covered, with a small sum left over for some fun, while at the moderate level, there’s more financial security and stability, meaning you have more to devote to the weekly food shop and can afford a fortnight in Europe every year.

Finally, there’s the comfortable retirement, which would mean more money for food shopping, as well as luxuries like regular beauty treatments, theatre trips and three weeks in Europe each year.

And the sums needed for each of those levels has increased significantly from the last time the figures were put together, for the 2022/23 financial year.

Those looking for a minimum living standard will now need to have an income of around £14,400 a year, a jump of 12% from the previous figure of £12,800.

There’s an even more substantial jump for those hoping for a comfortable standard of living, up 15% from £37,300 to £43,100.

However, the biggest shock is for those who just want a moderate living standard in retirement, with the required sum rocketing by a third from £23,300 to £31,300.

That’s an extra £8,000 a year, just for a moderate level of comfort in your later years.

It’s important to point out that these are all for single people.

While the required sums increase for couples, it may be easier to achieve, since a lot of your regular costs will be shared with your partner.

The impact of the cost of living crisis

The cost of living crisis has obviously had a dramatic impact on the sums needed to cover your retirement. 

The persistently high rate of inflation seen over the last couple of years has significantly pushed up the amount that will need to be set aside for essentials, while within the comfortable category, the PLSA has also suggested retirees will likely be offering some financial support of their own to hard-up loved ones.

It’s important to recognise that while inflation has been falling for a while, that does not mean things are getting cheaper.

It simply means that costs are increasing at a slower rate, so unless your income is doing the same, you will need to keep finding ways to stretch the money at your disposal.

An important point to bear in mind here is that costs will vary significantly by region.

Your living costs are going to be higher in the capital than elsewhere, for example, which will impact the minimum sums you need to save.

There is also the prospect of greater numbers reaching retirement and still having a mortgage to pay off.

The State Pension nowhere near enough

Of course, what’s clear is that the State Pension is not going to be enough to deliver even a basic level of comfort in retirement.

The old basic State Pension currently pays a maximum of £7,376, while the new State Pension pays £9,628.

And while they will be increasing by a substantial amount in April, courtesy of the triple lock, the reality is that they will still not be anywhere near enough to meet our needs, particularly given our life expectancy. 

Figures from the Office for National Statistics show that the average male aged 65 in the UK in 2020 could expect to live almost another 20 years, growing to 22 years for women.

So, it’s vital that those hoping to retire soon make sure they have enough money to last them through retirement.

We’ve picked the brains of financial planners to get a better idea of just what people nearing retirement should be doing, whether they have an undersized, average, or large pension pot at their disposal.

Sadly, many of us underestimate how much we are actually likely to need for a comfortable retirement and so don’t put enough aside during our working years.

So, if you are nearing retirement and are worried about having enough money in retirement, what can you do to ensure your later years are still as comfortable as possible?

Patrick Connolly, head of communications at Chase De Vere, flagged that people in this position face the difficult decision of either having to delay their retirement to save more, or commit to a frugal lifestyle once they do retire.

“You should carefully work out how much income you have now and much you are spending,” commented Connolly.

“Is there any way that you can increase your income or reduce your expenditure? If you have more disposable income, you can hopefully save some more money.”

For people approaching this position, he suggested doing whatever possible to save more in pensions and Individual Savings Accounts (ISAs).

“Even though you have left it late, it is better to save something rather than nothing at all,” said Connolly.

He recommended adopting a ‘fairly cautious investment strategy’; which would see around 30% to 50% of the portfolio invested in equities.

It is also important for people in this position to ensure they have sufficient money available in cash that they can turn to in case of any short-term emergencies.

Danny Cox, chartered financial planner at Hargreaves Lansdown, said that someone in this position is likely to be heavily reliant on the State Pension, and suggested an annuity is their best bet for their private pension pot as it provides certainty of income.

It’s worth looking into all your options and shopping around for the best rate possible if you want an annuity.

Cox added that while someone in this position is unlikely to pay much tax – any interest from their cash savings is likely to fall within the Personal Savings Allowance (PSA) – it is still a good idea to make use of an ISA.

If people in this position still find they are struggling, they may need to adopt a more significant life change, such as downsizing to a smaller property or going for an equity release scheme according to Connolly.

Cox also pointed out that a crucial part of planning for people in this position is to establish what flexibility they have in terms of how and when they will retire, as it is possible that retiring earlier will mean a lower standard of living during retirement.

If they are able to work a little bit longer and continue contributing to a pension, particularly if it benefits from employer contributions, it can make a noticeable difference to the income they can derive from the pot when they do eventually give up work.

Connolly suggested annuities will play a big role for pension savers in this position, either for part or all of their pension pot, as they provide some certainty on incomes without the risk of running out of money.

 “Try to maximise pension contributions in the run-up to retirement as this is likely to be the main financial goal, especially if you’re unlikely to have much disposable income in retirement,” said Connolly.

"And make sure you have a good understanding of your income and expenditure so that you aren’t living beyond your means or unnecessarily living too frugal a lifestyle.”

For an investment strategy, Connolly suggested around 50% of the portfolio should go into equities, with the rest going into fixed-interest assets and commercial property.

Having a more significant pension pot at your disposal should mean a comfortable retirement is within your grasp.

But this position presents plenty of its own challenges if you want to keep as much of that pot to yourself without surrendering large amounts to the taxman.

Connolly suggested it is worth looking at how you can make gifts or offer financial support to family members with money that you don’t actually need to maintain your own standard of living.

This is a useful way to reduce the size of your estate and so lower your Inheritance Tax (IHT) liability.

Everyone enjoys a £3,000 annual gift allowance, with additional gift amounts allowed on top in the event of things such as weddings.

For more information, check out How to cut your Inheritance Tax bill.

Connolly also recommended that people in this position access their savings through drawdown and keep the rest invested.

Doing this should give them more flexibility over exactly when they take an income and help them keep their tax bill to a minimum.

This has become particularly important after the introduction of pension freedoms, which means individuals can access their entire pension pot at once – but this comes with a significantly more punishing tax bill than accessing that money more slowly over a longer period of time.

As for an investment strategy, people in this position may be able to take a riskier one to try to generate larger returns, as they won’t be entirely reliant on all of their pension pot to pay for their future.

Connolly suggested people in this position consider investing as much as 70% of their portfolio in equities.

Having a plan in place is only the start – it’s not enough to make your investments and then hope that it all pays off as you need to keep reviewing how they are performing and change course if necessary.

“Ideally people should review how things are going every six months, or at the very least annually,” advised Connolly.

"This is even more important for less well-off people as they need to make sure the income they are taking will be sustainable for their lifetime.

“They are the ones most at risk of actually running out of money.”

If you need a change, consider putting your money in a Self-Invested Personal Pension (SIPP).