How much should I save for retirement?

I am sure that we can all come up with our own ideas of what we want to do in our retirement. What we might not know is how are we going to pay for it. A full UK state pension, for someone starting to draw it today, is currently £175.20 per week. Somewhat less than the Office for National Statistics figures for UK average earnings of £585 per week. (2019).

Some readers, sadly not the writer, have a defined benefit or “final salary” pension. You can see the income you have built up and are likely to get by looking at your annual statement. Those of us with a defined contribution pensions do not know what income we might get from the pot. We put in what we can and cross our fingers hoping it will work out. What if we started to plan about how much we might need to put away? If I was looking to retain that national average income, how much would I have had to save each month to provide myself with £410 a week on top of the state pension for the rest of my life?

Income in retirement can come from a multitude of ways. Using a pension, given that is what they are designed for, might be a good starting point. When we get to retirement, we can then use the pension pot to provide an income. Pension freedoms gave us all more choice about how we access our pensions to provide an income. One of the options is to buy an annuity. While these are not as popular as they once were, they can still be the right decision. An annuity is giving a lump sum to an insurance company who in return guarantee an income for the rest of your life (or a fixed term depending on what you buy). So how much might an annuity cost to provide £410 a week for the rest of your life? According to the Money Advice Service website it might cost £374,210 to buy (based on current annuity rates.) *

The table below shows the impact on starting to save early.

We have used a forecast gross annual return of 4% over the various investment time periods. However, such forecasts are not a reliable indicator of future performance. The value of investments can fall as well as rise and will have an impact on the pot size when aged 65. Inflation will reduce the spending power of this money. The income that might buy per week as outlined above, will be reduced by investment charges on pension fund investments.  

The main thing the table above shows is the importance of starting early. Someone starting at 22 needs to put away a little above half of someone starting 10 years later. This is around a third of someone who doesn’t start until they are 42. Getting into the habit of saving and starting early is so important. With a pension once you have saved it you can’t access it, without big tax penalties, until you are 55. This forces the habit as you can’t spend it. 

It may be possible that you'll be able to save more—and in unforeseen circumstances, sometimes less. What is important is to be aware of your savings goal and checking your progress regularly to help stay on track. 

*Annuity was for a male aged 65, living in Swindon, income paid monthly in arrears and would be subject to income tax at marginal rate.

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