A comfortable retirement is the end goal for most who work to build up a generous pension. However, it can be hard to know how much you will need.
According to consumer group Which?, the price tag of a happy retirement is £305,000. Someone who wants a “comfortable” retirement would need at least £19,000 per year or £26,000 for a couple.
Savers need their pensions to provide £12,548 per year, which in addition to the average state pension payout of £8,060, would give them £19,000 after income tax. This would be enough to cover the essentials and regular short-haul holidays, leisure, tobacco, alcohol and giving to charity, according to Which?.
This would cost £305,710 if bought using an annuity at age 65. However, savers who kept their pension pot invested in the stock market and regularly took income, known as drawdown, would only need £192,290, some £113,000 less.
A life of luxury would cost a single person £31,000 every year or £41,000 for a two-person household, the Which? report found.
Someone who could take that income would be able to afford both the “essential” and “comfortable” standards of living as well as extended or long-haul holidays, health club memberships, expensive meals out and a new car every five years.
The “luxury” lifestyle is achievable for anyone who has saved up £422,140 by age 65 for drawdown. Securing that via an annuity would cost £671,000.
Which? calculated that a basic retirement would cost £13,000 per year for a single person, so the state pension falls short of this. Savers need £5,048 per year from their personal savings just to make ends meet, covering food and drink at home, housing payments, transport, bills, insurance and clothes.
This would require £123,365 to buy the income via an annuity, or £77,350 if a pensioner opted for drawdown.
Is my pension on track?
To save £192,290 – the pot needed to fund a comfortable retirement via drawdown – a 25-year old would need to put aside £1,505 a year in the stock market, according to insurer LV. This assumed investment returns of 5pc per year, the long-term average.
The later they start, the more they will have to save as investments have less time to grow. Someone starting 10 years later at age 35 would need to pay nearly double, £2,718, to reach the same figure by 65.
A luxury standard of living would require annual savings of £3,303 from age 25. This would add up to £422,140 by retirement age.
Andrew Gray, of LV, said: “Retirement is expensive and saving as much as you can as early as you can is one way to ensure you end up with the retirement you want. The earlier you start, the longer your money will have to grow. If you saved £100 a month from the age of 25 you could end up with a fund of £145,000 at 65 – but only £45,500 if you started saving at 45.”
Jenny Ross, of Which?, said most people needed to put away significant sums if they wanted to be sure they could enjoy a comfortable retirement but they may struggle to know if they are on track.
Ms Ross urged the Government to make it easier for workers to know how much they have saved so far and offer guidance on what this could be worth in retirement.