The amount someone needs to save toward their pension depends on how much they want to live on (Image: GETTY)
The amount someone needs to save toward their pension depends on how much they want to live on when they retire.
For example, the mean UK average wage is £38,131, and if someone wanted to maintain their current lifestyle when they retired, new data suggests they would need over £800,751 (pre-tax) in their pension pot.
This takes into account the average person would need enough in their pension pot to guarantee that income for around a 21-year retirement, based on current life expectancy statistics.
However, experts warn there are “other important considerations” that this simple calculation does not account for, and suggest cashflow modelling is a “better way” of working out how much one might need.
Paul Clifton, director of wealth planning at Arbuthnot Latham explained that cashflow modelling considers factors beyond just one’s own goals, like inflation and the assumed growth in the value of their investments.
State pension age is currently 66 in the UK (Image: EXPRESS)
It can also consider one-off events such as downsizing your home or receiving an inheritance. This can help form a picture of how much you need to save each month.
How much money should people save each month for their pension?
The benefit of compounding means that the gains – in theory – get exponentially bigger over a longer period.
Experts at Arbuthnot ran calculations on how much people could earn by putting money in their pension from 20 years old.
Savings amount per month:
£100
Projected savings aged 55: £195,933
Projected savings aged 68: £464,305
£200
Projected savings aged 55: £391,866
Projected savings aged 68: £838,416
£300
Projected savings aged 55: £524,571
Projected savings aged 68: £1,118,873
The current new state pension is £10,600 (Image: GETTY)
So, the earlier one starts, the more it can build over time. Mr Clifton suggested that with any excess income, it is important to balance the amount people pay into their pension with their other needs. A wealth planner can help people find their optimal mix.
The ‘best way’ to save for a pension
According to the Retirement Living Standards, a comfortable retirement works out to £33,600 per year, which is under the average UK salary. This covers all the basics and then some, with more luxuries such as a longer holiday each year, people can live the same lifestyle they were when working.
With the current new state pension (£10,600), someone aspiring to live comfortably would need to save £627,844 alongside it. If they’re not expecting to get the full new state pension, they’ll need to have saved up to £869,533 in their pension pot depending on if they are receiving any state pension at all.
Whatever someone’s goals, it may be difficult to reach these figures simply by saving by themselves.
Mr Clifton said: “While there are many types of personal savings plans available, many use their work-provided scheme as their main form of pension planning.
“Schemes can differ, but they can offer some, or all the following benefits:
- “Tax efficiency – pension contributions are often deducted before tax and National Insurance contributions are calculated, although be aware there are limits to your tax-free allowances.
- “Assets inside a pension grow free from income tax and capital gains tax (and can be passed on free of inheritance tax).
- “Employer contributions – employers must contribute a percentage towards your workplace pension.
- “Compound gains – if it is invested well, the pot also grows over time above your own investment. The crucial component here is the compounding factor and this is why it is so crucial to begin saving as early as possible for your pension.”
The average UK pension pot for someone aged 64 is £107,300, according to the ONS. If individuals qualify for the state pension, then they would be just above the ‘minimum’ retirement standards bracket (£12,800 a year). A ‘minimum’ lifestyle covers all of someone’s needs, with “some left over for fun and social occasions”.
For a comfortable retirement, people will need nearly six times the average UK pension pot, with £627,844.
When looking for ways to increase one’s savings, Mr Clifton suggested that wherever possible, it is always worth considering putting some money aside for the future.
He said: “Whether for retirement or other purposes, it might be worth considering something like an ISA or investment account which, due to the compounding effect of returns, can generate a higher rate of return than simply saving.
“Pensions form a key part of most people’s wealth strategies. From initial tax benefits and employer contributions to inheritance tax benefits, they are one of the most efficient investment vehicles.
“However, there are many elements to consider from risk appetite to when and how you might want to access your pension. There is no one size fits all approach, and professional financial advice is key to ensure your wealth management strategy is designed to meet your future financial – and lifestyle – goals.”
