New figures reveal the targets you should be hitting from your twenties to fifties if you want a comfortable retirement. Here’s how much you will need to have saved
Retirement might feel like a distant concern when in the thick of working life, but how much you save – and when you start – can make all the difference between scraping by and living comfortably in your later years.
The amount you will need in your pension pot depends on many factors including your housing situation, whether you’ll have dependents, your health and life expectancy, and, crucially, whether you’ll still be paying rent or a mortgage in retirement.
For younger generations, in particular, the financial outlook is shifting.
Fewer people own their homes outright by retirement age, and long mortgage terms – sometimes stretching into a borrower’s seventies – mean that the old assumption of being housing-cost free in later life no longer holds for many.
Rising life expectancy also means savings may need to last for 20 to 30 years or more.
At the same time, relying solely on the state pension – which for the full new rate currently provides £11,973 per year – is unlikely to deliver anything close to a “comfortable” lifestyle, particularly if it is subject to future reforms such as means testing.
All of this makes personal pension saving more important than ever. But how much should you have tucked away by the time you’re 30, 40, or 50?
Here, The i Paper breaks down the figures, provided by wealth management firm Quilter, and speaks to experts about what you should aim for at each stage of life – and what to do if you’re not quite there yet.
All assumptions for how much are needed at each age are based on individuals who have an average of five per cent annual growth on a moderate pension portfolio with an annual salary of £40,000 contributions with five per cent employee and three per cent employer contributions increasing with inflation. It also assumes people are retiring at 65.
In your twenties: it’s all about starting early
The good news is, if you’re 20 and expect to get the full state pension, you technically don’t need anything in your pension pot yet to reach the Pensions and Lifetime Savings Association’s (PLSA) minimum lifestyle target, which Quilter used to crunch the numbers.
However, the minimum target is £14,400 a year for a single person, which would not offer enough for those looking to have a more comfortable retirement.
For a moderate lifestyle with the state pension, you’ll need around £17,400 saved – and without the state pension, that figure jumps to £74,000, according to the figures.
For those eyeing a comfortable retirement, you’ll need £102,000 with the state pension or £167,000 without.
This means people looking for a more pleasant retirement may wish to start their pension pot in their twenties, tucking away what they can. This could vary depending on how much they are earning or how much they can afford to put aside.
Ian Futcher, financial planner at Quilter, said the early period of working is crucial: “While these figures are only a guide it is worth noting that you need to build up a relatively significant pension pot just to achieve a moderate lifestyle.
“Starting young is key as pension pots have a compounding effect that helps money grow much more the longer it is in the pot.”
Gary Smith, financial planning partner at Evelyn Partners, added a word of warning for the next generation, saying: “For those who are aged 20 or 30, it would be prudent to plan for retirement assuming that they will receive either no state pension, or a reduced state pension.
“It is highly likely that some form of means testing will be introduced within the next few decades.”
In your thirties: building consistency
By 30, you should ideally have £14,000 saved to meet the minimum standard without the state pension.
However, only £100 is needed if you expect to receive it. Throughout the figures will show the sharp difference the state pension makes in how much people should save dependent on whether they expect to receive it or not.
To maintain a moderate lifestyle, you’ll need £62,500 with the state pension or £134,000 without. For a comfortable retirement, that rises to £165,600 with the state pension and £242,000 without.
This is where people often begin to worry they’ve fallen behind – but Craig Rickman, personal finance editor of interactive investor (ii) said there’s still time to course correct.
He said: “If your pension savings are a bit light by the time you hit your thirties or forties, try not to panic.
“More immediate financial goals such as buying a home, getting married and starting a family may naturally take priority.”
Still, he said now is the time to get serious. He added: “A really good starting point is to think about the things you’d like to do in retirement and calculate how much your desired lifestyle will cost every year.
“Then head online and find a pension calculator to estimate what action is needed to get there.”
His key tips are:
- For people to maximise employer contributions, which he said is essentially “free money”.
- Boost contributions when you get a pay rise.
- Make the most of pension tax relief – where every £1,000 you put in can cost just £800 or even £600, depending on your tax band.
In your forties: catch-up time
By your forties, the pension targets increase sharply. You’ll need £56,000 to meet the minimum standard without the state pension (just £110 with it).
For a moderate lifestyle, you’ll need £124,200 with the state pension, or £214,000 without. For a comfortable retirement, the target is now £245,615 with the state pension, or £339,000 without, Quilter said.
According to Mr Futcher, it’ll get harder to make up ground with contributions alone at this age.
He said: “It gets hard at this stage to make up difference with additional contributions.”
However, it’s also often when earnings peak and expenses like childcare start to fall. Tom Selby, director of public policy at AJ Bell, said this is the ideal time to maximise saving efforts.
He told The i Paper: “As we get older, our wages tend to rise and costs often fall, which means your forties or fifties might be when you hit your peak ability to save for retirement.”
If you’re behind, don’t panic – but do act, he advised.
In your fifties: the final push
With retirement approaching, there’s less time to rely on compound interest to do the heavy lifting.
You’ll need £112,900 saved to hit the minimum standard if you don’t receive the state pension (just £120 if you do).
For a moderate retirement, you should be aiming for £201,826 with the state pension or £321,000 without. To reach a comfortable lifestyle, those numbers are £352,000 and £475,000, respectively.
Mr Futcher said: “It gets hard at this stage to make up difference with additional contributions.”
That’s why Mr Selby urges people to take full advantage of the system’s incentives.
He said: “The key message is to take action as early as possible, saving as much into your pension as you can afford and maximising any employer contributions, upfront tax relief and tax-free investment growth.”
It’s important to remember that these PLSA benchmarks assume you’ll be mortgage or rent-free in retirement – a huge caveat, Mr Futcher said.
He explained: “Many struggle to find the money to buy a house or are forced to take out marathon mortgages with terms that stretch into their seventies.
“While these numbers make sense now, for future generations these figures may have to rise considerably.”
And social care costs aren’t included in the PLSA assumptions either.
He added: “The message is clear, take saving for retirement into your own hands and do not rely on the state pension as this will not be enough to give you a retirement you aspire to.”
Mr Smith said that the figures may already be too low, though, adding: “I believe that the projected figures are probably understated, with significantly more required in your pension fund.”
How to boost your pension
Utilise tax relief
Pension savings benefit from tax relief, meaning money you save into a pension is free of income tax on the way in.
Pensions can be an especially tax-efficient way of saving for higher rate taxpayers. For example, if you earn £65,000 a year and put £10,000 into a pension through salary sacrifice, the whole £10,000 would go in as a contribution.
But if you wanted to save that £10,000 elsewhere or spend it, 40 per cent income tax and two per cent national insurance would be charged first, leaving you with a tax bill of £4,200 and only £5,800 to spend.
Max out employer contributions
If you are employed, your first step should be to check the pension benefits your employer offers. All employers must provide a workplace pension scheme and contribute a minimum of three per cent of your salary by law.
But some employers will be more generous than this. Some may pay in a percentage that is well into double figures, or will offer to “double match” your contributions up to a certain amount.
For example, they may pay in 16 per cent if you contribute eight per cent.
Check national insurance contributions
To get the full state pension of £221.20 a week, you need at least 35 qualifying years of national insurance contributions. You will need at least 10 years of contributions to get any state pension.
Check your national insurance record through your personal tax account on the gov.uk website to see if you are on track.
You can top up gaps in your national insurance record for the previous six years. Some can buy back missing national insurance years dating from 2006. This may be worth doing to help you get the full state pension.
