How much do I need to save for retirement?

The big question when thinking about the future is, "How much do I need to save for retirement?". Unfortunately, the answer isn't necessarily straightforward as it depends on factors such as your life expectancy and how much later life income you will need. A lifestyle fuelled by champagne and sports cars will need a significantly larger fund than if you’re mortgage free and just want to have some extra after covering the bills.

How much you will need in retirement is different to what others will need,  so it’s important to assess your current lifestyle and think about the sort of retirement you would like. Earlier this year the chancellor announced that the lifetime allowance will reduce from £1.25 million to £1 million, which may prompt you to adjust your savings plans. If the lifetime allowance is exceeded a 55% tax charge is applied to lump sum withdrawals.

A £1 million fund may sound like a pipe dream, but would currently only provide an index-linked income of around £20,000 per year*. It’s entirely possible to retire with £1 million, without sacrificing the family holiday or winning the lottery. Regular contributions into a pension fund receive tax relief to help increase the size of your fund, and employer contributions are one of the ways workplace pensions can benefit you as they increase your fund value even more.

Auto-enrolment is not enough – and excludes the self-employed

With the rollout of auto-enrolment, millions of people will be enrolled into a workplace pension scheme. Although this will help retirement provisions for many, it is not sufficient to rely on without increasing the contributions or having other savings. Currently, auto-enrolment has a minimum contribution of 0.8% of an employee’s salary, and the following table demonstrates the power of tax relief and employer contributions:

Your contribution: 0.8%
Tax relief: 0.2%
Employer contribution: 1%
Total: 2%

This means that for every £80 saved, a total of £200 is added. However, auto-enrolment does not cover the self-employed, so other provisions are essential.

How long will you live?

You can’t be expected to know precisely how long your fund will need to last, but being aware of the average life expectancy can be very useful. One of the risks of the new pension rules is that people may deplete their fund too quickly by underestimating how long it will need to sustain them, or at the other extreme they may expect to live to 110 and spend too little for a comfortable life.

For a 65 year old today, the life expectancy in the UK is a further 18 years for men and 21 years for women, and these will increase the younger you are.

Once you have this information you can start to plan an income, taking into account your current earnings and expenses and how your outgoings should change in retirement – such as no longer paying a mortgage or commuting. Including extra money and a safety net, you should be able to come up with an annual income that you think you’ll need.

However, saving is only part of the process; you also need to maximise those savings. Low growth and high charges can erode the value of your fund, especially if you have multiple pensions. Consolidating or transferring to a more efficient scheme can make a huge difference to your retirement plan and increase the amount of later life income you could receive.

Are you maximising your chances of a good later life income? Let us know with a comment below.

Call 0800 304 7288 for a friendly chat about your pension

Important information

*The quote for an annual income, retrieved on May 21 2015, is based on a 65-year-old male in good health taking 25% tax-free cash and purchasing a guaranteed annuity with escalation in line with RPI and a dependent’s percentage of 50%.

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section:

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