Pension savings: how much you really need for a comfortable retirement

Updated on 23 February 2018

Knowing how much you need to cover your retirement isn't always the easiest number to calculate, but you can adjust your strategy depending on the size of your pot.

Your retirement savings goal: are you on track?

How much money do you actually need to cover your retirement?

According to research last year from Key Retirement, the average pensioner needs a minimum annual income of £10,830 just to meet costs, though this can vary significantly by region.

For example, to be a pensioner in the North East costs a massive £4,700 a year less than in London, the study suggests.

That’s just on necessities though. How much do you need in order to live a little after you’ve packed up work?

A study last year by Tilney suggested that an average pensioner household spends £26,500 every year between the ages of 65 and 75.

Given the State Pension for a couple pays around £12,000 a year, that’s a significant amount that will need to be covered by some form of personal pension saving.

The average Brit will also live to be more than 81, according to the most recent figures from the Office for National Statistics. While increases in life expectancy have slowed in recent years, we are still living longer and that comes with a cost.

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.

I haven’t saved enough

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.

According to Aegon, the average pension pot currently stands at around £50,000, so if you are packing up work with less than that at your disposal, what can you do to ensure your later years are still as comfortable as possible?

Patrick Connolly, certified financial planner at Chase De Vere, points out that people in this position face the difficult decision of either having to delay their retirement in order to save more, or else commit to a frugal lifestyle once they do retire.

He continues: “You should carefully work out how much income you have now and much you are spending. 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 suggests doing whatever possible to save more in pensions and ISAs, adding: “Even though you have left it late, it is better to save something rather than nothing at all.”

Connolly also recommends adopting a “fairly cautious investment strategy”; this would see around 30-50% of the portfolio invested in equities.

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

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

He adds that while someone in this position is unlikely to pay much tax – any interest from their cash savings will fall within the Personal Savings Allowance – so it is still a good idea to make use of an ISA.

If people in this position still find they are struggling, then 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.

Compare savings and ISAs with loveMONEY

I have mid-level savings

Cox notes that couples will need to find around £8,000-£12,000 of income on top of the State Pension a year to enjoy some comfort.

Connolly points 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 – then it can make a noticeable difference to the income they can derive from the pot when they do eventually give up work.

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

He adds: “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.

"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.”

As far as an investment strategy, Connolly suggests around 50% of the portfolio should go into equities, with the rest going into fixed interest assets and commercial property.

I have a healthy pension pot

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 suggests it is worth looking at how you can make gifts or provide financial support to family members with money that you don’t actually need in order 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 liability. Everyone enjoys a £3,000 annual gift allowance, with additional gift amounts allowed on top in the event of things like weddings.

For more read How to cut your Inheritance Tax bill.

Connolly also recommends that people in this position access their savings through drawdown, keeping the rest invested. Doing this gives them more flexibility over exactly when they take an income, ensuring they can keep their tax bill to a minimum.

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

As for an investing strategy, people in this position are able to take a more risky strategy in order 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 suggests that people in this position can consider investing as much as 70% of their portfolio in equities.

You need to review over time

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, you need to keep reviewing how they are performing and change course if necessary.

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

"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) – compare opportunities with loveMONEY (capital at risk)


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