According to recent research, around a third of Brits don’t know what constitutes a good pension pot1. And there’s no denying it – working out how much you’ll need in your pension to retire comfortably is not an easy task, especially as so much could change by that time.
But it’s essential to have some sort of estimate if you want to take control of your future retirement. So, here are some things to consider.
So, what is a good pension pot?
There’s no right or wrong answer as what might constitute a good pension pot will mainly depend on your retirement goals. So, ask yourself: how much retirement income would you like to receive in later life?
To help 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 will be cut in half when you retire, 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.
Another factor to bear in mind is that with the high cost of buying a home, you may not necessarily be rent or mortgage free when the time comes for you to retire. In fact, a Which? survey from 2021 found that 52% of people who took out a mortgage that year would still be paying it at age 65.
After considering the above, 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 currently 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.
As an example, according to the Pension and Lifetime Savings Association's (PLSA's) Retirement Living Standards, a single person could need £10,900 a year at a minimum to retire, and this amount increases to £20,800 for a 'moderate' retirement, and £33,600 for a 'comfortable' retirement. The amounts defined are based on costs such as home improvements, holidays, clothing and footwear, and giving to charity. However, they don't take into account costs like mortgage payments, rent or other household bills.
In fact, in a Which? survey from 2022, individuals that have a 'comfortable' retirement (by their definition) spend around £19,000 per year, while those who are enjoying a more 'luxurious' retirement spend £31,000. And unlike the totals calculated by the PLSA, things like housing costs and utilities are taken into account.
So, 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 could 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 9,627.80 a year3. Although it might seem like 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 could give you some extra money during later life. A good way to boost your retirement savings could 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 capital gains tax on any profits you make from your money being invested. 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. So, 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 £433,1484. And if you can’t afford to invest £350 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.
Do you know how much you’ll need in your pension pot for your dream retirement? Our pension calculator can help give you a good idea of what you might need to save.
Personal Pension A simple way to save for your long term goals. Pay in as often as you want and get an instant 25% tax relief top up from the government.
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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 £275,322. If markets perform better, your return could be £700,485. Includes tax relief. Values correct as of 03/01/23.
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.