What is a Good Pension Amount for Your Retirement Goals

What is a good pension pot at 55? How big a pension will you need to be able to live comfortably when you retire?

In this article, we’ll examine what a good pension pot is considered to be, how that compares to a typical state pension and the ways in which you can boost its value.

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What do the words ‘pension pot’ mean?

The words ‘pension pot’ refer to the total amount of money that you and your employer (if you are not self-employed) contribute towards your retirement. It also includes any interest accrued from the investments within the pension fund, if it was set up to accrue interest.

When considering what is a good pension amount, your pension pot does not include your state pension, which is the amount awarded to you by the UK government. It includes your workplace pension, plus any other private pensions you might have – you may have several.

Your fund providers should issue you an annual statement to update you with the current and projected values of each account. Alternatively, some providers may give you the option to check for yourself what the fund is worth on their websites.

What is a good pension pot for a single person?

Understanding what a good retirement income will be is a pretty tricky thing to get your head around, especially if your retirement is a long way off.

Pensions and Lifetime Savings Association (PLSA) put retirement prospects into three categories – Minimum, Moderate, and Comfortable. The table below shows what is considered to be an adequate pension in each of the categories for both singles and couples (State Pension included).

The figures are different for singles and couples in the London Area.

But what do these arbitrary catalogues include when considering what is a good pension amount?

• Minimum – Food and drink (£54 per week, including eating out), council tax, mortgage or rent payments, clothes and shoes (up to £580), health products, household items, insurance, transport (but no car), and utility bills.
• Moderate – All of the above (up to £791 on clothing and shoes, and £74 per week on food), upgrading a car every ten years, and a two-week European holiday every year.
• Comfortable – Everything listed under essential and comfortable, plus £144 on food and eating out, a three-week holiday in Europe every year and upgrading your car every five years.

The age at which you can withdraw money from your pension pot

Before you can access any of the money in your pension pot, you must reach a certain age. This age is set by your pension providers and is usually 55. If you are forced to retire early through poor health or some sort of disability, the minimum age might change, but it is dependent on which pension provider you are with.

A pension pot you can retire on at 55 years of age

Some people live for work and wouldn’t dream of retiring early. Others would love to retire early, and 55 is the age that these people often aim for. But what is a good pension pot at 55? What should you be aiming for?

What is a good pension amount depends on the lifestyle you hope to enjoy when you retire. Based on the figures shown above, as compiled by PLSA? It suggests an income of around £24,000 per annum would give you a more than comfortable retirement, covering all of your creature comforts plus the odd luxury now and again.

The average life expectancy today is about 83 years of age, so if you’re hoping to give up work at 55, it means that your pot is going to have to be big enough to fund your income for 28 years. So, the answer to the question of how much is a good pension pot UK 55-year-old couples will need is approximately £358,400 for a minimum lifestyle and £652,400 for a moderate lifestyle.

If you are a couple hoping to enjoy a luxury lifestyle together in your requirements, you’ll need a pension pot of over £730,000.

The UK average retired household income

We’ve talked about the various incomes needed to support certain categories of retirement lifestyles in theory, but what is the reality?

According to figures taken from the Office for National Statistics in 2022, the actual average retired household annual income is only £25,900. It is well below the figure of £34,000, which is what the Pensions and Lifetime Savings Association recommends.

Will your pension run out?

The state pension is guaranteed for life. So too, are final salary pensions. It is the responsibility of the government or your employer to ensure there are sufficient monies to cover paying your pension until you die.

These types of pensions are not very flexible; however, the retirement benefits are extremely valuable. Unfortunately, the increasing cost associated with running these pensions has meant they have become something of a rarity in the private sector. They are, however, still available for workers in the public sector – civil servants, NHS workers, the police, and teachers.

If your pension is a defined contributions scheme, you can leave your retirement savings untouched and allow them to hopefully grow further; purchase a guaranteed income with an annuity or go for income drawdown. The choice is yours.

However, if you choose to go down the drawdown route, there is always the possibility that your pot will run out, so the answer to the question of how much is a good pension does rather depend on how much you are going to draw down or take out.

Most of this article has concentrated on retiring at 55, but what is a good pension pot at 60 years of age? Let’s take a look.

Retiring at 55 may be beyond your financial means if you want to enjoy a comfortable retirement. But 60 may be feasible as it allows another 5 years, during which you and your employer continue making contributions.

The general rule of thumb within the pension industry is that you should plan for between 20 and 25 times your annual retirement expenditure. So, if you plan on spending £20,000 per annum retirement, the answer to what is a good pension pot looks like this:

• £20,000 x 20 years = £400,000, or 
• £20,000 x 25 years = £500,000

The big question, though, is how long you expect your retirement to last. Remember, the average life expectancy is approximately 83 years.

Understanding Inflation’s Impact on Your Pension Amount

When asking yourself, “what is a good pension amount?” it’s crucial to consider the potential impact of inflation. Inflation represents the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. Over time, this can significantly erode the value of your pension pot.

For example, at an inflation rate of 2% per year, the purchasing power of a given pension pot would effectively halve in just over 35 years. This means the amount that seems adequate today may be insufficient for maintaining your desired standard of living in the future.

Understanding inflation and incorporating it into your retirement planning is an essential part of ensuring you have a good pension amount. You can read about the impact of inflation on your savings on the UK Government’s website.

Getting professional advice

Most private pensions will allow you to access the funds when you reach 55. You can usually withdraw 25% tax-free. Obviously, the more to take out, the less will be left, and if that remainder is earning interest, the less interest it will make. You could decide to take out an annuity, but many people are put off by how little they are guaranteed in terms of regular retirement income.

This is when getting the right professional advice can be invaluable. A wealth management specialist will be able to tell you what is a good pension pot, and whether or not your fund lives up to your expectations. If not, they will be able to advise you on the best steps to take. Your options could include:

• Increasing the size of your pension contributions
• Re-evaluating your planned age of retirement
• Reducing your planned expenditure
• Looking for a better return on your investments

The key thing to bear in mind is that drawing down funds from your pension pot is risky. Once the money has gone, you are not likely to be in a position to replace it, and this is where a lot of people go wrong.

Now is the time to act

If you are still some years away from retirement, now is the time to review your pension pot situation. You still have time to modify your plans and make the right investment decisions. If the answer to what is a good pension pot at 55 doesn’t cut the mustard, you still have a few years left to ring the changes.

Don’t take any chances. The closer you get to retirement age, the less manoeuvrability you have. If you need to take professional advice, please do so.

FAQ

What is a good UK pension income?
A good UK pension pot for a comfortable retirement starts from £13,000 per annum. However, a pension pot of £23,000 to £38,000 per annum is required if you want a more lavish retirement lifestyle.

Can I retire at 60 with 500k in the UK?
Yes, you can retire at 60 with 500K in the UK. However, it depends on the kind of monthly income you want in retirement because your lifestyle and individual circumstances will impact your quality of life. If you are a frugal spender, a 500K pension pot will go a long way, and you can have a comfortable retirement.

How much do I need in my pension to retire at 55 in the UK?
You can access your pension at age 55, but you need to save up more because you are retiring early. If you wish to retire at the age of 55, you need to start saving early, and you will need at least a £400,000 to £650,000 pension pot.