Working out how much you need to save for retirement can feel a bit like trying to answer the question “how long is a piece of string?”
You might not know yet exactly when you’re going to retire – or what your financial circumstances will be like when the time comes, especially if your income has recently fallen or you’re struggling to make ends meet due to the current cost of living crisis.
But tempting as it may be to just avoid the question altogether, it’s worth getting to grips with roughly how much you should be putting away, so that hopefully once you’re back on track financially you’ll be able to start topping up your retirement savings.
Here’s what you need to know.
How much do I need to retire?
You’ve probably seen lots of scary headlines about the amounts we need for a comfortable retirement.
According to the Pensions and Lifetime Savings Association (PLSA), for example, to achieve a moderate standard of living in retirement, a couple sharing costs and each receiving the new full State Pension (about £10,600 in 2023/24) would need an income of around £34,000 a year. They would need to build up a retirement pot of £187,000 , based on an average annuity rate of £6,845 per £100,000, on top of their State Pension. Read more in our guides How the State Pension affects the income you need in retirement and Annuities explained.
To achieve a comfortable retirement living standard, however, a couple each receiving the full State Pension would need to build up total retirement savings of £485,000 , based on the same annuity rate. This is to achieve an income of £54,500 a year in retirement (including the full State Pension). Find out more about how the State Pension works here.
Someone with £100,000 in pension savings who buys an annuity at age 65 could receive an annual retirement income of around £7,017 a year, if they shopped around for the best rate. Annuity rates have increased sharply over last year. Read more in our guide Why it pays to shop around for your annuity.
Saving up a total of £485,000 probably seems like pie in the sky to most of us, so rather than focusing on these sorts of daunting figures, think about how much is achievable for you.
A good rule of thumb to help you decide how much you need to retire is to take your age, halve it, and then contribute this percentage of your salary to your pension every month for the rest of your working life.
If, for example, you’re 50, you should aim to save at least 25% of your salary before it’s taxed every month until you retire. That means if you’re earning £2,000 a month, you should ideally pay £500 of this a month into your pension (25% of £2,000).
Of course, that can be easier said than done, especially if your outgoings mean you don’t have much spare cash available each month. If that’s the case, just put away what you can afford to. You might not end up with enough to provide you with a comfortable retirement, but every little helps and you’ll also benefit from tax relief on your contributions.
How much will I end up with if I stick to auto-enrolment contributions?
If you’ve been auto-enrolled into your employer’s workplace pension scheme, under current minimum contribution limits, you’ll be paying in 5% of your salary before tax (of which 1% is tax relief), whilst your employer will pay in 3%, bringing the total contribution to 8%.
It’s worth noting however that these auto-enrolment contributions only have to be paid on ‘qualifying earnings’ of between £6,240 and £50,270 in the 2023/24 tax year. This means low and high earners may in fact have a lower effective contribution than the headline percentage figures. If in doubt, speak to your HR department or workplace pension provider to understand how your workplace pension scheme works.
Some employers will pay in more than the minimum contribution, and you can also pay in extra if you want to. If you’re not able to pay in more though, don’t panic. The Institute of Actuaries says that people making the minimum auto enrolment contributions, and who have a full record of National Insurance contributions (NICs) and so are eligible for the maximum State Pension (£203.85 a week in the 2023/24 tax year) should be on track to achieve what they call a ‘minimum’ retirement living standard – enough to cover all your needs, with a little bit of spare cash left over.
Based on the Pensions and Lifetime Savings Association’s Retirement Living Standards, you’d need an income of £12,800 a year to achieve this minimum standard.
Find out more about how auto-enrolment works in our guide How does pension auto-enrolment work?.
How do I find out how much income my pension pot will provide me with?
One of the biggest challenges you may face when saving for retirement is working out how much income your retirement savings are likely to provide you with.
You can use the Rest Less pension calculator to get an estimate of the income you’ll receive at retirement based on your pension’s value. This can include your State Pension entitlement if you want it to, and you can also see the impact of taking 25% of your pension as tax-free cash. You can amend your retirement age and the level of income you want as well, to see how these affect the length of time your pension will last.
Read more about the different annual and lifetime pension allowances here and about tax relief in our guide How pension tax relief works.
Where can I find out how much I’ve got in my pension?
Your pension provider should send you a statement every year telling you what your pension is worth. If you can’t find yours, give your scheme administrator a call and ask them for a current value.
To help ensure we’re all better informed about our pension savings and how much we should be putting away, anyone who’s over-50 and has pension savings will receive a ‘Wake-Up’ pack from their pension provider.
This will tell you how much you’ve already saved, what sort of income it might provide you with in retirement, where your money is invested, and how much you’re paying in charges. These packs will be sent out every five years until you start taking money out of their pension pot.
Planning for retirement isn’t always straightforward, but the Government’s Pension Wise service, run by the Pensions Advisory Service and Citizens Advice, provides people aged 50 and above with free guidance on their pension choices at retirement. You can give them a call on 0800 138 3944 to book a free appointment, or you can book one via the website.
If you’re not sure whether you’re saving enough, or you don’t fully understand where your money is being invested, you might want to speak to an independent financial adviser who can recommend the best course of action based on your individual circumstances.
If you’re considering getting professional financial advice, Aviva is offering Rest Less members a free initial consultation with an expert to chat about your financial situation and goals. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.