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The latest figures have revealed that a couple now needs to spend more than £60,000 a year for a comfortable retirement – assuming that you own your own home and have paid off your mortgage.
But is this realistic? And how much money do you need in your pension pot (or other savings) to make sure you have enough?
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A single person needs to spend about £13,400 a year to reach a ‘minimum’ retirement standard (which means an income of at least £13,608 before tax). And a couple needs a combined £21,600, according to new figures from the Pensions and Lifetime Savings Association (PLSA). These guidelines are based on research from Loughborough University.
The minimum figure has gone down slightly since the previous report in February 2024, in part because of lower energy prices – but the ‘moderate’ and ‘comfortable’ figures have increased. Costs for living in London are a bit higher.
The ‘minimum’ standard is based on:
To fund a ‘moderate’ retirement a single person needs to spend £31,700 while a couple needs to spend £43,900. That means an income of £36,483 before tax if you're living alone, or £24,295 before tax if you’re in a couple.
“The cost of living has put enormous pressure on household finances and, as the research shows, this is no different for retirees,” says Nigel Peaple, Director of Policy and Advocacy at PLSA.
The ‘moderate’ standard is based on:
A ‘comfortable’ retirement would require spending of £43,900 for one person and £60,600 for a couple. Once you factor in tax, that means an estimated total income (including the state pension) of £52,220 for a single person or £34,733 each if you’re in a couple.
The ‘comfortable’ standard is based on:
All of these figures assume that you're not paying rent or a mortgage and that you have a free bus pass. You can see the exact breakdown of what goes into a minimum, moderate and comfortable pension amount at the PLSA's Retirement Living Standards website.
However, as the PLSA says: “Not all savers are the same, they will have their own expectations and requirements when it comes to visualising their retirement.” Your pattern of spending might not exactly match these estimates, but they should at least give you a rough idea of what you might need to spend in retirement.
A different way of approaching it is that you're currently working full-time, some experts suggest that aiming for 50-66% of your current income as your retirement income is a good level to aim for. Again, this will depend on your own circumstances and your plans for retirement.
Tom Selby, director of public policy at AJ Bell, comments: “The good news for retirees is that the pain of rocketing inflation is now easing, which in turn is reflected in the drop in the cost of a ‘minimum’ retirement living standard. While the ‘moderate’ and ‘comfortable’ living standards have seen marginal increases, these are significantly below the eye-watering rises we saw off the back of the cost-of-living crisis in the early 2020s.
“This is clearly a positive development although the nature of inflation means living costs for everyone, including retirees, will almost certainly be permanently higher in the future. And there is no getting away from the fact that the pension pot sizes needed to achieve the moderate or comfortable living standards, particularly for a one-person household, are staggeringly high.
“Being told you need to build a pension pot worth £500,000 plus to enjoy a decent standard of living in retirement might feel intimidating. The key is to focus on saving as much as you can afford from as early as possible, taking advantage of incentives like employer contributions, tax relief and tax-free investment growth.”
So, what kind of pension savings do you need to reach a minimum, moderate or comfortable living standard?
Firstly, it’s critical to remember that there is no ‘golden number’. How much you need will depend on an enormous variety of factors, from whether you own your home, to the cost of living in your area, to how much you consider to be a ‘good’ standard of living.
But there are some rough numbers that have been calculated to help you plan. Some experts suggest that £500,000 in your private pension or savings is a sensible amount to aim for, if you live alone.
According to the PLSA, you'd need £303,000-£490,000 in your pension pot for a moderate retirement and £540,000-£800,000 for a comfortable one – potentially more in London.
These are indicative figures based on using your pension pot to buy an annuity. Bear in mind annuity rates vary between individuals and can change frequently.
If you’re only aiming for a ‘minimum’ standard, you’ll need about £20,000-£25,000 (on top of the full state pension) to fund a minimum standard of living in retirement.
If you’re in a couple, things are significantly easier. The PLSA believes you'll be able to hit the target for the minimum retirement as long as you both get the full state pension. A moderate retirement would need £165,000-£250,000 per person in retirement savings, as well as your state pensions, while a comfortable retirement would require a pension pot of £300,000-£460,000 each.
There are also lots of pension calculators online which can help you to plan. For example, the government's MoneyHelper pension calculator can help you to choose a target retirement income, and will tell you whether you're on track to meet it or not, based on your current pension pot and level of contributions. You can also adjust factors like your retirement age and level of contributions, to see what difference those will make.
Choosing an annuity has become more popular recently and gives some certainty over your retirement income. An annuity is an insurance product where you swap a pension lump sum for an income that’s guaranteed for life. The exact income you'll get from an annuity depends on a lot of different factors including interest rates, your age, health (if it’s a lifetime annuity) and whether you want it for life, or for a fixed amount of time.
If you choose a fixed annuity, you’ll receive the same amount each year, so the value of your income will erode over time due to inflation. An annuity that rises to match rising living costs is another option, but is a much more expensive choice and can take years to catch up to a fixed annuity.
MoneyHelper has a useful annuity calculator that will run you through the different things that can affect the amount you’re offered, so you’ll be able to see what your retirement pot (or the amount you think you might have) will get you under today’s market conditions.
If you’re in your 50s, you still have time to bolster your pot – and doing so at any age will have a positive impact on your final amount to retire on.
Tom Selby, director of public policy at AJ Bell, says: “Automatic enrolment has been successful in boosting pensions participation in the UK, but the harsh reality is that anyone on minimum contributions – currently set at 8% of earnings between £6,240 and £50,270 – is at risk of falling well short of their retirement expectations. The big danger here is that, without a scaling up of minimum contributions, millions of people will sleepwalk into a retirement shock and be forced to choose between working longer or living on less money in their later years.”
Scott Gallacher, financial planner at Rowley Turton, suggests maximising your earnings potential (if you can and if increasing your pension pot is one of your goals) in this period by pursuing opportunities for promotions, salary increases and higher-paying roles. Some employers offer more generous pension contributions than others, so that’s something to assess if you’re considering changing jobs.
“You should also develop a comprehensive budget to identify areas where you can trim expenses and redirect those savings towards your retirement fund,” he adds.
Adding more money into your pension can often be a good investment, if you can afford it now. In simple terms, for basic rate taxpayers, if you pay in £1,000, you’ll be adding £1,250 into your pension. If you pay higher or additional rate tax, you can claim back the additional tax above the basic rate via your self-assessment tax return. Although the value of your pension investments can rise and fall, the more you're able to pay in, the bigger your pot is likely to be at the end.
Tim Morris, a financial adviser from Russell and Co, recommends making use of any unused pension annual allowance (you can currently pay in up to £60,000 a year, or 100% of your salary) from previous tax years, if you can. This could be especially useful if you receive a lump sum inheritance or other windfall, as you might find that it allows you to pay the whole amount in and get tax relief on your contribution.
If you’re unsure how much of your pension annual allowance you’ve used up, the government has a handy calculator to help you work it out. You’ll need to find your pension contributions for the last three years in order to use it.
If you’re considering paying a one-off large amount into your pension, it’s recommended that you think about getting help from a financial adviser, as they can help you manage it in the most tax-efficient way.
Gallacher also suggests checking to see if your employer will match how much you put in your pension, as some will double what you contribute up to a certain amount. You could also check to see if your company offers ‘salary sacrifice’, where you and your employer agree to reduce your pay and have the reduction paid into your pension.
This isn’t the best option for everyone, depending on things like your current salary, so it’s also worth taking professional advice to see if it's right for you.
If you’re approaching retirement – or if you’ve recently retired and haven’t done this yet – it’s time to conduct a thorough review of your expenses. Make a spreadsheet and write down all likely sources of income and your outgoings. Don’t forget old pensions from former jobs too, so you can build a picture of what your retirement will look like. If there’s a shortfall, see what you can cut back on to help make ends meet. And always make sure you’re claiming any state benefits that you may be entitled to.
While you might be looking forward to leaving work, it doesn’t mean you have to stop completely. Consider whether you can make up any shortfall in your pension through a new part-time role that excites you. That could be in employment or doing your own thing, perhaps trading goods, dog walking, gardening for neighbours, or driving a taxi.
It's also important, as you take your pension over the years, to keep an eye on the amount in there. Taking too much too soon can dramatically affect the value in later life. So getting professional advice on how to predict your expected income could be a smart move.
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