According to the Institute of Actuaries, about a third of Brits don’t know what constitutes a good pension pot1. There’s no denying it, working out how much you’ll need in your pension to retire comfortably is not an easy task. But it’s essential to have some estimate if you want to take control of your retirement. Here are some things to consider.
So, what is a good pension pot?
There’s no right or wrong answer – what constitutes a good pension pot will mainly depend on your retirement goals. How much retirement income would you like to receive in later life? To answer this question, it could be wise to list all the potential expenses you’ll likely face in retirement. It’s often assumed that your cost of living as you retire will be cut in half, but that’s not necessarily true. Whilst your mortgage payment and commuting costs may disappear, other expenses, such as travel, leisure activities, and health care may increase, and you could be spending as much as you used to during your working life. So, it’s important to consider these future costs when thinking about your desired retirement income. Then, if you want to have a rough idea of how much you’ll need to save to reach your target, you’ll need to estimate (roughly) how long you’ll be retiring for – we know that’s a tricky one since nobody’s got a crystal ball, but life expectancy in the UK is 81 years, so you could use this to give you a good idea2. Once you’ve estimated the duration of your retirement life, you should be able to calculate how much you’ll need to save.
Say you find that you’ll need an annual income of £30,000 to have a comfortable retirement and you’re planning on retiring at the age of 67. Assuming you’ll live until 81, you’ll need about £420,000 in your pension pot by the time you retire – that’s definitely not a small sum, but don’t worry, there are ways that could help you get there.
How can you boost your retirement savings?
If you want to build a good pension pot and reach your target sum, you’ll need to find ways to boost your retirement savings. If you live and work in the UK, and make national insurance contributions for 35 years or more, you should be able to claim the state pension, which is currently set at £9,100 a year3. Although it’s a decent amount, it probably won’t get you to the comfortable retirement you’d hoped for.
If you’re employed in the UK, you’ve got your workplace pension(s) which should give you some extra money during later life. A good way to boost your retirement savings would be increase the amount you contribute to your pension. As things currently stand, you have to contribute at least 5% of your salary and your employers will pay a minimum of 3% of your pay. However, if you can afford to contribute more and want to, you could decide to pay in more – but again it’s up to you.
Now having a state pension and being enrolled in workplace pension schemes doesn’t necessarily mean that the job is done. You may still be short on money, and it could be useful to check what other options you’ve got. If you’re looking to build a good pension pot, paying into a personal pension could help. With a personal pension, or Self-Invested Personal Pension (SIPP), you get to make your own contributions and you don’t need to pay UK tax on any profits you make. And that’s not all! You’ll also receive a little gift from the government in the form of tax relief – this is to compensate for the income tax you’ve already paid. So, say you’re a basic rate taxpayer whose income gets taxed 20%. If you earn £1,000, you’ll have £800 left after the government takes £200 from your earnings. But if you put your £800 in a personal pension, the government will give you back £200 – think of it as a little incentive to encourage you to plan for your retirement. If you do the maths, you’ll notice that each of your pension contributions will benefit from a 25% uplift – it’s because £200 is 25% of £800. Obviously, this top-up could help you boost your retirement savings, so it’s definitely an option worth considering if you’re looking for ways to make your pension pot grow a little bit bigger. One thing to note though is that you’ll only get tax relief on £40,000, or 100% of your earnings (whichever is lower).
Opening a personal pension and making contributions over the long-term could bring you a step closer to achieving your retirement goals. Let’s go back to our previous example and imagine that you’ll need about £420,000 to retire comfortably on your 67th birthday. Assuming you’re 30, you could potentially reach this number by investing £400 a month in a personal pension – in fact, by doing this, you could end up with about £484,1724. And if you can’t afford to invest £400 a month, don’t worry, you could start with smaller amounts, and when your financial situation improves, you could consider increasing your contributions that will help you reach the perfect number.
If you’re looking to open a personal pension, digital investment platforms could help. With Wealthify, you can get started with just £50, and we’ll do the hard work for you, from picking the right mix of investments to managing your pension on an ongoing basis. And you’ll have full control over your pension as you’ll be able to check how it’s performing anywhere, at anytime.
4: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £308,425. If markets perform better, your return could be £781,522. Values correct as of 24/04/20.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.