The common UK pension pot, and what makes a superb one
If I’m looking to be financially secure in retirement, how much pension do I need?
Planning for later life can be daunting, not least because you have to make decisions now for a retirement that could be decades away. By the time you reach that age, it’s highly likely you will stop working, meaning your income will drop significantly. Your lifestyle, health and circumstances could also be completely different, with financial implications for each.
By that point, which pension decisions you’ve made and how much money you’ve put away could mean the difference between a life of limited means and the lifestyle you’ve worked so hard for.
Experts say a “comfortable retirement” now costs around £43,000 a year, and with retirees now facing six figure shortfalls between the state pension and even the most basic retirement, most of us will rely on a private pension to make up the difference. But what is a good private pension pot?
Telegraph Money explains how to work out what you need and what you’ll need to do to get there.
This article will cover:
- What is the average pension pot in the UK?
- What is a good pension pot?
- How much pension do I need?
- How to calculate my target pension income
- Am I saving enough?
- How to improve my pot (without simply saving more)
What is the average pension pot in the UK?
According to the latest figures from the Department for Work and Pensions, the average single pensioner has an income of £13,884 a year. For couples, that jumps to £29,172 between them. This is after housing costs.
Around 70pc of pensioner households have an income from a private pension. In total, 98pc receive the state pension.
According to the ONS, the median average UK pension pot is £32,700, yet this varies significantly depending on age and pension type. For 25-34 year olds, it’s £9,300, but for 55-64 year olds it rises to £107,300.
The chart below shows the size of the average pension pot up to 2020. The figure is falling because of the introduction of compulsory workplace pensions in 2012, which produced millions of small pension pots, dragging down the average.
What is a good pension pot?
Ultimately, a “good” pension pot is one that is going to provide you with the retirement you want.
According to the Pensions and Lifetime Savings Association, a trade body, a “comfortable” retirement includes a generous food and clothing budget, a luxury two week holiday and three domestic mini-breaks, along with a relatively new car.
In today’s market that equates to an annual income of £43,100 for single people and £59,000 for couples. The amount is lower for a moderate or minimum income, which both come with lifestyle changes.
To reach the amount for the Pensions and Lifetime Savings Association’s various levels of retirement, the size of the pot varies substantially depending on which level you’re aiming for.
If you’re just starting your pension, here’s an idea of how much you’ll need to put in. Bear in mind these figures will change depending on market conditions. The amount of money you need to generate, say, £31,000 a year in retirement will fluctuate depending on bond and stock markets (see table, below).
If you’ve already started, there are lots of different factors to consider, like how old you are and how much you’ve already got.
There is also the state pension to consider, as this will count towards your income – meaning you might not need to save as much.
Keep in mind though that the state pension age might increase before you retire – and you might not want to wait that long to stop working.
Telegraph Money’s state pension age calculator will tell you just how long you might end up waiting for your state pension.
You’ll get tax relief on the contributions you make and your employer will pay in too, so as long as the right amount is going in every month, you might not need to contribute it all yourself. Most people have more than one pension pot, so remember to factor those in as well.
However, you should also remember that your provider will invest your fund over the years. This means it can go up or down, and this too affects how much you need to put in.
The key to reaching and maintaining a good pot is to monitor it and keep checking you’re on track for the retirement you want. You can view it at any time and most providers will offer online access. You’ll also receive an annual statement, which will give you a forecast showing how much you’re on course to get if you retire.
You should look at all this information carefully and judge whether you need to make any changes. Consider financial advice if you think you need it.
Ms Holgate added: “There’s no golden rule for how much money you’ll need in retirement, as much will depend on when you retire, what you plan to do in retirement, and how long you live.
“Only by running through your expenditure and lifestyle goals will you be able to get a clear picture. This is where a financial advisor can work with you to decipher what your needs and objectives are for retirement and therefore the required income for your circumstances.”
When you come to retire, you’ll have a number of different options. These can affect the size of the pot you need, and in turn, the pot you achieve can affect what your options are. This is why it’s important to take decisions carefully, seeking expert advice if you need it.
Alistair McQueen, of Aviva, said: “The great news is that pension savers have more flexibility than ever when deciding how to use their money. Choice is to be celebrated, but it means that more time and consideration is probably required. You may have been saving for forty years, so take more than 40 minutes when deciding your next steps.
“Take advantage of the free help that is available on many credible websites, and consult with the government-backed PensionWise service. You may also want to consider paying for financial advice.
“Your pension may be your biggest asset. Spending some money on some extra help today could reap great rewards in the years to come.”
How much pension do I need?
The simple answer is: it depends.
Generally, the more you put away, the more you will have when you retire. But if you die earlier than expected, you’ll miss out on money you could have enjoyed during your working life. If you save more than you can afford, that money is locked away and you could start to struggle now.
However, putting away too little could hinder your quality of life later on, when you might value comfort the most – and it’ll be too late to change it.
The PLSA says that 76pc of people are on track to meet the Minimum retirement, including all couples on the full state pension. One in five workers should reach the Moderate level, and only 8pc will achieve the Comfortable level.
This can be a useful guideline, but the actual amount you will need depends on many factors, like your circumstances, your income, where you live and what’s achievable, along with the lifestyle you’re seeking.
Helen Morrissey, of Hargreaves Lansdown, said: “It’s important to take a bit of time to think about what you want your retirement to look like and how much that might cost. The PLSA has its retirement income standards, which provide a good rule of thumb, but everyone’s needs are different and you might find you need more or less.”
How to calculate my target pension income
According to Royal London, the average income people think they’ll need in retirement is £15,348. But this won’t be enough for everyone, and it can be difficult to know where to start with your own calculation.
One way to plan for retirement is to choose a target income, then work out how much you’ll need in your pot to provide it. You’ll need to think about the lifestyle you want to lead and when you might want it to start. But before that, you should start by looking at your existing finances.
Lily Megson, of My Pension Expert, said: “At the outset, determining your target income for retirement requires a thorough assessment of your financial situation. Retirement planners must take stock of their existing savings, investments, pension funds, and any other assets earmarked for retirement. It’s also crucial to also track down any overlooked small pension pots that may have been forgotten. These savings and investments then have to be balanced against any debts and outgoings.
“Once your financial situation is clear, the next step is to define your retirement objectives. This involves envisioning the lifestyle you aspire to in retirement, including factors such as housing arrangements, daily expenses, travel and leisure pursuits. Naturally, a more comfortable retirement lifestyle necessitates a higher annual income.”
As a starting point, some experts suggest the 70pc rule, where you aim for 70pc of your current salary as a retirement income. Another option is to aim to build a pot that is 10 times your annual salary.
However, it may be that neither of these methods are right for you.
Michelle Holgate, of wealth manager RBC Brewin Dolphin said: “Some people will say that you need a multiplier of your current salary as a retirement income, however your current requirements will not necessarily match those you have in mind for your retirement. It is best to regularly evaluate your pension savings to see if they are on track to meet the level of income you need or would like in retirement.
“The retirement pot size will depend on your retirement goals. Many people assume they need an income similar to their current income, however this could be more or less throughout your retirement years for many reasons.”
Once you do get an idea of the kind of the retirement income you want, online calculators like the one offered by Aviva can show how much you might need in your pot to provide it.
Am I saving enough?
If you’re just starting a pension, some experts advise dividing your age in two and adding that to your pension as a percentage of your pre-tax salary.
Using this method, if you began at 24 then 12pc would be the right amount. If you don’t get underway until 34, you’d need to put in 17pc. This includes tax relief and any contributions from your employer.
If you’ve already started, again the key is to keep an eye on your pots and make adjustments where needed.
Ms Morrissey added: “Check how much you’ve got in your pensions and use a pensions calculator to check if you are on track. Don’t worry if you aren’t, many of these models will show you the potential impact of boosting your contributions so you can pull together a plan for what you need to do. It’s never too late to make a difference to how much you end up with, but by engaging early and regularly you can really keep yourself on track and take a lot of the fear factor out of pension planning.”
It’s important that your pension pot doesn’t run out and leave you struggling financially in the future. However, there is a danger you could save too much in the present, especially as it becomes locked away until your late 50s.
Ms Holgate said: “It’s really important to ensure that any pension savings are affordable, as there is a minimum age that you can access the funds again and your personal tax situation will be a consideration when making withdrawals. You can’t access money in a defined contribution pension until age 57 for most schemes, or 58 from April 2028, so you must be comfortable locking away your savings for the long term.
“A good place to start would be to draw up a list of your regular expenditure, both essential and discretionary, and then work out how much money is left over each month.”
How to improve my pot (without simply saving more)
If you feel like you’re already putting in as much as you can, there are other ways to add money to your pension.
Ms Morrissey added: “It can be hard to carve out extra money from a budget that might already be stretched. However, taking the opportunity to boost your contributions every time you get a pay rise or new role can be a relatively pain-free way of increasing how much is going in. You haven’t got used to having that money in your pocket yet, so you won’t miss it. It’s also worth checking if your employer is willing to pay more in if you do. This is known as an employer match and can be a good way of really boosting your contribution without necessarily putting in much more yourself.”
There is also tax relief to consider. If you pay tax, you’re entitled to the same rate of tax relief on your pension contributions. This will be done automatically, so if you pay 20pc tax, every £100 you put in only costs you £80. You’ll still get this on your contributions even if you don’t earn enough to pay tax.
If you’re a higher rate tax payer, i.e. you pay 40pc or 45pc, you can also benefit from additional tax relief on your pension contributions. This means every £100 will only cost you £60 or £55.
Only 20pc is added automatically, so to get the extra you will need to either fill in a tax return or contact HMRC and tell them. This is particularly relevant if you’ve got a pay rise or promotion that’s taken you into the next tax bracket for the first time, as it’s money you might not be used to claiming.
