Saving for retirement might not be at the top of everyone's financial "to do" list but paying regularly into a pension pot is the best way to secure a future income.
Yet working out how much money you will need in retirement, and the amount you should save to achieve this, can be tricky.
"It's never too late to start saving for retirement but the earlier you can do it the better, as you benefit from investment growth and compounding. But even if you are in your mid-40s it is not too late to start," says Fabian Taylor, chartered financial planner at Nelsons wealth management.
The best starting point is to estimate your expenditure on retirement and to gauge the type of lifestyle you would like.
Costs such as mortgage payments and caring for children may disappear but other expenses may rise.
Spending on holidays, eating out, and hobbies may be higher at the beginning of retirement and reduce as people get older, while expenditure on utility bills, health, and insurance premiums may increase.
A survey carried out by Which? in 2020 showed that the annual spending for a retired couple wanting a lifestyle to cover the essentials was a little over £17,000 a year. For a comfortable retirement, expenditure increased to £25,000 and for a luxurious retirement, expenditure was £40,000 each year.
For the essential lifestyle, expenditure covered the basics – for example, groceries, housing payments, insurances, transport, utilities, health, household goods and clothes.
A comfortable lifestyle in retirement covered all the basic areas of expenditure, as well as some luxuries such as European holidays, hobbies, and eating out, while a luxurious retirement included long-haul holidays and a new car every five years.
Expenditure for a single person in retirement was £13,000, £19,000 and £30,000 for a lifestyle covering essentials, a comfortable retirement and luxurious retirement respectively.
Sources of income
The state pension will form the backbone of retirement income for most people, but to be eligible you must have 35 years' worth of national insurance contributions. The age at which you can access your state pension is 66 but this will rise to 67 by 2028.
The current state pension rate is £179.60 per week.
Assuming a couple is entitled to the maximum state pension, this would provide more than £18,000 worth of income per year. You can obtain a state pension forecast on the government’s website.
On top of the state pension, you may have private or occupational pensions. There are two types: final salary (defined benefit) or money purchase (defined contribution).
On retirement you may have the option to drawdown as much money as you want, as and when you need it, or to be paid via an annuity which guarantees a set income for life.
How much will I need?
For a 66-year-old married couple in good health and wanting a comfortable retirement, both receiving the full state pension, they would need additional income of just under £7,000 to reach £25,000 a year, according to calculations by Nelsons.
If an annuity is the chosen route, they would require a pension pot of £249,174 to receive the additional income.
For a luxurious retirement, a pot of £799,633 would be required to generate an income of just under £22,000 on the same basis.
With drawdown, your money remains invested while taking withdrawals and can potentially benefit from investment growth.
Assuming that you live to the age of 94, withdrawals increase by 2% each year to match inflation and the drawdown pot grows by an annualised rate of 3% after fees, you would need a pot of £173,000 for a comfortable retirement and £554,000 for a luxurious retirement.
How much should I save?
A couple aged 30 with no pension savings would need to save £177 each month for a comfortable retirement or £126 per month if they already have a pension pot of £50,000.
A couple starting to save for their retirement at age 40 would need to put away £306 a month, or £218 per month if they already have pension savings of £50,000.
At age 50, a couple would need to save £607 monthly if they had no pension savings or £432 a month if they have savings of £50,000.
The figures for a luxurious retirement are, understandably, higher, starting at £564 a month for a couple aged 30 with no pension funds or £514 a month for those with amassed pension savings of £50,000.
A couple would need to save £979 a month at age 40 if they had no pension savings, while this reduces to £809 monthly if they have £50,000 in pensions.
For couples aged 50, the monthly savings needed would be £1,943 if they had no pension funds, or £1,767 if they had £50,000 in pensions.
When deciding on the best type of pension for your circumstances there are three main considerations, says Taylor: "Look at the fees. The higher the costs the more it will erode the value of the pension. There is also the investment choice which needs considering. And then, finally, look at whether there are any valuable features with it that you don't want to give up."