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How much do I need for retirement?

We all know how we want to spend our retirement, whether it’s exploring the jungle, baking for the grandchildren or salmon fishing in the highlands. But, after years of navigating the rush-hour commute, working long hours and making sacrifices for your children, it’s time to put yourself first. One thing’s for sure: you’ll need to be able to afford it.

How Much do I Need to Retire: Summary Table

❓ Is state pension enough to retire?No
🤏 How much do I need to retire at 55?It depends on the type of lifestyle you want in retirement
🧮 How can I calculate my retirement income?By using a pension calculator
😊 Should I choose an annuity or drawdown?It depends on your personal circumstances as there are some factors that could influence your decision

The difficulty of the pensions landscape and its use as a political football each election cycle make it easy for some Brits to put their head in the sand when it comes to saving for their pension, writing it off as something they can’t afford.

How much do people spend in retirement?

The good news is that many overestimate how much they’ll actually need for retirement. Of course, it all depends on how you plan to live out your twilight years, but if you want a comfortable life with a couple of European holidays each summer, you’ll need a post-tax income of around £28,000 a year, research from consumer group Which? shows.

After all, you won’t be paying for a mortgage or commuting, and your children will hopefully be independent.  

Fancy something a bit more luxurious? You’ll need a post-tax annual income of £45,000 a year if you’re looking forward to more exotic travel and want a new car every five years.  

Will a state pension be enough?

You will qualify for the state pension as long as you’ve contributed to national insurance for 30 years in some way and are at the age of retirement.

Unfortunately, the hard truth is that you can’t rely on the state pension to cover what you need to live comfortably through retirement. If you reached pension age – currently 65 for a man and 64 for a woman – before 6 April 2016, the most you can get is £125.95 a week – that’s around £6,500 a year. If you reached retirement age after 6 April 2016, you should get the full new state pension if you have 35 years of NI contributions. This means you’ll get £185.15 a week, which is around £9,627.80 a year, you still won’t get a lot. 

This is why Brits need to supplement the income from their state pension with a defined benefit contribution scheme. This is where you build up your pension pot throughout your working life, often with help from your employer.

The tax benefits to those saving for a pension are generous. You can claim relief relative to how much tax you pay, so if you are a basic rate payer, you will pay £8,000 for a £10,000 pension contribution, and a higher rate band will pay just £6,000.

How much do I need to retire at 55?

Retirement planning is about choosing an appropriate retirement age for yourself, and retiring at 55 means that you need to be able to meet your income needs from private investment and/or the pension benefit from your pension pots and retirement accounts. However, you will not have access to State Pension until you are in your 60s.

A pension pot worth around £500,000 is sufficient for most people as it provides an annual income of around £20,000. Some consider £20,000 moderately adequate, while others may consider it inadequate. It all depends on your definition of a comfortable lifestyle. Many people target a £1,000,000 pension pot because it would generate an annual income of around £40,000 per year, which is a very comfortable standard of living, especially if they retire at 55.

How much do I need to retire at 60?

You have more money to work with when you retire at 60. For a single person household, a comfortable retirement income for a 60-year-old is around £20,000, while a luxurious retirement income that includes travelling and holidays is above £30,000. If you want a comfortable retirement before your £9,627.80 full state pension kicks in at age 66, you will need roughly £120,000 in personal income. After 66, you will need £10,372 in personal income.

However, if you want a yearly pension income of £30,000 in retirement for 20 years, you will need £425,000 with a 4% growth in workplace pensions, private pensions, and investments and savings.

Calculating your retirement income

If you want to save for retirement but don’t want to do the maths, you can use a pension calculator to estimate how much your pension will amount to in retirement. There are other pension calculators online. The calculation is based on your age, defined pension contributions, current pension value, personal monthly pension contributions, the age you want to retire, and annual gross income goal. 

How much should I have in my pension at 40?

How much you should have in your pension at 40 depends on what type of retirement you are aiming for. At 40, you have 26 before hiting the state pension age and 15 years before you can have access to your pension. As a single person, the general rule of thumb states that you should be saving at least 20% or three times your salary in your pension pot. For example, if you plan to retire at age 66, your pension pot at 40 should be around 20% of your total pension pot.

How much does a couple need to retire

Retirement doesn’t come cheap. But the sooner you start saving for your future, the less it impacts your day-to-day living. Even if you can’t meet guidelines set by experts, saving something is better than nothing. Extensive research was done by Which? in 2022, on how much couples will need to retire when they reach the state pension age. The amount is slightly higher than a single-person household.

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To have a comfortable retirement with a £28,000 per year income drawdown, a £144,950 pension pot is required. A £144,950 pension pot growing at 3% a year and no pension savings will require a couple in their 20s to save £182 a month, while a couple in their 30s will have to put £237 aside from each pay-cheque. But leave it too late, and you can eat away your pension savings. Couples in their 40s have to save £329 per month, while couples in their 50s have to save £554 per month.

To reach a £144,950 pension pot with an established £100,000 pension pot growing at 3% a year, couples in their 20s and 30s don’t need any save anything per month. However, couples in their 40s must save £30 per month and couples in their 50’s need to save £113 per month if they have £100,000 in their pension.

For a luxurious retirement with ​​£45,000 per year from income drawdown, a £470,580 pension pot is required. A £470,580 pension pot that grows at 3% annually, couples in their 20s have to save £591 per month, and couples in their 30s must put £769 aside from each salary. Couples in their 40s will have to save £1,068 per month, while couples in their 50s have to save £1,800 per month.

For a luxurious retirement, couples in their 20s will have to save £351 a month, and a couple in their 30s will have to put £493 aside per month if they have a £100,000 pension that grows at 3% annually. However, couples in their 40s will have to save £690 a month, and couples in their 30s will have to put £1,299 aside per month if they have a £100,000 pension that grows at 3% annually.

This just proves that if you’re organised from an early age and strict with yourself, saving for your pension doesn’t need to be stressful. 

What’s better: annuity or income drawdown?

Once you’ve built up your savings, the question turns to how you access your pension throughout retirement.

An annuity is where you transfer your pension pot to a provider, who guarantees you a regular income until you die. This will be a percentage of the pension transfer amount. For example, if you had £200,000 of savings and are offered an annuity rate of 5%, you will get £10,000 a year.

The remainder of your pension pot will go to your annuity provider when you pass on unless you’ve chosen a joint-life scheme, where your income will continue to be paid to your partner or spouse until they die.

Annuities are great for those wanting a regular income throughout retirement, but not if you want to leave something for your children.

That’s why a pension income drawdown is also a popular option, especially after recent pension freedoms. As your pension pot stays invested in the market throughout retirement, you draw money out of your savings to use as income after the age of 55, usually for a charge.

Pension freedom changes mean investors can now withdraw 25% of their pension pot upfront free from tax. After that, you can decide how you want to access your savings, which will be taxed in line with income tax rates.

If you pass away before the age of 75, your pension pot will be inherited tax-free. After the age of 75 and your pension will be subject to a 45% inheritance tax if taken as a lump sum, or regular income tax rates if drawn down gradually.

Making sure you plan for retirement in the best way for you and your family can be difficult. If you need any help, talk to an independent financial adviser and be sure to read our pension guide.

FAQ

How much do I need to retire?

It depends on the lifestyle you want to have in retirement. You need around £20,000 in annual retirement income to live a minimal lifestyle and over £20,000 per annum in retirement income to live a comfortable lifestyle. On the other hand, if you want a luxurious lifestyle with vacations, you need a retirement income of £30,000 to £40,000 per annum.

Is 500k enough to retire in the UK?

Yes, you can retire with a 500K pension pot. If you don’t have any mortgage or debt and want to live a minimalist or comfortable lifestyle in retirement, then a 500K pension pot is sufficient.

Do I pay National Insurance if I am retired?

You stop paying national insurance contributions once you reach the state pension age. Therefore, if you retire early, you will have fewer qualifying years of national insurance, which may reduce your State pension amount.

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