How much do I need to retire?

Moderate

At the 'moderate' level of spending, assuming the full State Pension is available, an individual would need £12,700 a year in addition to this, and a couple would need £12,800. If one was in need of an incentive to form a long-term relationship, perhaps the apparent economies of scale for couples is an obvious one demonstrated here. We calculate that an individual might need c. £333,000 and a couple c. £355,500 invested in a pension at age 66 in order to achieve this. This assumes that tax is paid at 20% on income withdrawn in excess of any tax-free lump sum (15% effective rate on the total pension income) and therefore, the shortfall may be greater if tax is paid at a higher rate.

Comfortable 

At the highest spending level considered by the study, an additional £26,700 (for an individual) or £33,300 (for a couple) per year would be required. For the individual, this equates to a pension of c. £700,000 at age 66 or c. £872,000 for a couple. Again, this assumes tax is paid at 20% on income withdrawn, which is likely to be the case if tax thresholds remain the same and if income is split evenly between a couple.

What does all this mean for me?

While studies such as that provided by the Pensions and Lifetime Savings Association are useful, in our experience, the figures provided are conservative. Desired spending levels are different for everyone and it isn’t necessarily just about how much of a lavish lifestyle you lead, but it's also very dependent on where you live. According to some research,** the cost of living for people in London and the South East is on average c. 47% higher than for those in the North East of England. The study we've referred to has examined the whole of the UK when clearly, costs can vary significantly. The costs taken into account are also normal expenditure items so do not include significant costs such as long-term care or large unexpected items.

** https://abcfinance.co.uk/blog/the-true-cost-of-living-in-uk-cities/ - average cost of living per household graphic.

The best way to plan for the future (and particularly retirement) is to have as good an understanding as possible about how much you want (and need) to spend. Once you’ve got that figure (and you know your target retirement date), it’s easier to work backwards and calculate how much you might need to save in order to achieve this. 

Where do I sit on these scales? 

You may think it’s all well and good providing a general guide as to the amount one might need in a pension, but how do I get to this and more specifically, how much would I need to save every year? Of course, this depends on how long a period you have to save, and how the underlying investments perform, but as an example , let’s take a 40-year-old with no current pension savings. Please note the figures below show the net amount, assuming that the savings are paid into a pension and tax relief of 20% is added to this (the net amounts would be lower if higher or additional rate tax relief is received).

*Figures rounded to the nearest £100

To demonstrate the benefits of saving earlier, the equivalent annual savings required by a 30-year-old individual to reach the ‘comfortable’ spending level would be £7,300. This would be £64,800 less over the duration of saving than that required when starting at age 40.

Final thoughts

While the State Pension provides a minimum level of income, not all individuals will have a complete National Insurance record and as such, will not received the maximum State Pension available. It's important to check your record and avail of a limited opportunity to top up any incomplete years before April 2025. 

We’ve used the example of pension savings here, however for many people, pensions aren’t as tax-efficient as they once were. Many individuals are still affected by the government’s reduction to annual pension allowances, so they are no longer the default option for all. If you’re in a situation where saving into a pension above certain levels each year may result in a tax bill for you rather than a tax saving, there are other options available to allow you to save for retirement and increasingly we see our clients using a range of different income sources in retirement. 

Exactly what savings or investment option is right for you will depend on your tax position and attitude towards risk, as well as wider financial circumstances. The key is not to defer your financial planning to another time but to have a strategy that will ultimately get you to where you want to be.

If you’re unsure which decisions to make about family wealth, or how to go about planning for your future, rely on our experts to support you and provide clarity on your financial position. Wherever you are in your life journey, or whatever your goals maybe, we’ll work with you to help you get to where you want to be. Please fill in the form below and one of our experts will be in touch to discuss your requirements and how we can help.

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Buzzacott Financial Planning is authorised and regulated by the Financial Conduct Authority.

This article has been prepared to keep readers abreast of current developments. Professional advice should be taken in light of your personal circumstances before any action is taken or refrained from.

The value of investments, and the income from them, may go down as well as up and investors may not get back the amount originally invested.

Assumptions and figures 

All pension figures have been calculated assuming that flexible drawdown is used to generate income rather than buying an annuity. In projecting pension values, we have assumed that investment returns are in line with an average annual investment return of 5.0% gross pa, charges of 1.25% pa apply and long term inflation runs at 2% pa. All figures are in present value and it’s assumed that any payments from the pension increase in line with inflation to meet expenditure requirements.

We have also assumed that income starts being drawn from the pension at age 66 and this lasts until age 94. Currently a 66 year old female has a one in four chance of living to age 94 (Office of National Statistics). If an annuity was purchased rather than using flexible drawdown, the figures would then change in line with annuity rates and other factors.