COMMENT
Why You Need a £300,000 Pension Pot!

By Alison Hunt (TMFAlly)
April 28, 2005

How much do you think you would need to fund a decent retirement?

A survey of independent financial advisers has found that, apparently, more than a quarter of us believe that £100,000 would be a healthy figure to aim for in our retirement fund.

Wow, sounds like a lot, doesn't it? But what if you were to realise that £100,000 would actually provide you with an annual income of £7,171. Doesn't sound like quite so much now, does it? Especially when you realise that level of income is actually 29% below than the minimum wage!

The average figure that clients believe is the 'ideal' pension fund at retirement is £187,000 – which would still only provide an annual income of £13,241 - 40% below the average national wage.

Yes, apparently half of us are woefully unaware of how much we need to have set by in order to guarantee ourselves a comfortable retirement.

In actual fact, a pension pot of at least £300,000 would be a more realistic target for those wishing to have a comfortable (but not lavish) retirement (providing an annual income of around £21,000).

Of course most people will be panicking at this figure – it seems so unachievable. But remember, most of us have many years before we will be retiring – and even small sums of money can grow enormously over ten, twenty, thirty, forty or fifty years. The trick is to begin as soon as possible to get interest on your interest – remember the miracle of compounding.

One of the most astonishing facts to realise is, if you were to save £100 each month for the first eighteen years of your child's life and then stop, by the time your child retires at 65, he or she would have a pension pot of over £1,000,000 (assuming 7% growth after charges). Of course inflation would take its toll, but it's still not a bad sum for just 18 years of investment.

So if you'd like to get your retirement fund in order, here are three things to bear in mind:

Pension Scheme

If your employer provides a pension scheme, take advantage of it! If you don't and your employer offers to contribute to it too, you're effectively turning down free money from your boss.

If, for example, your scheme offers to contribute up to 5% of your salary and you earn £20,000 a year, that's effectively £1,000 each year that you're turning down! Find out more here.

Signing up is easy to do – simply speak to your finance or Human Resources department – they should be able to explain how the scheme works and set it up for you.

And don't panic if you don't work, or your employer doesn't offer a pension scheme – you can always take out your own, low-cost stakeholder pension.

As a rule of thumb you should aim to save around half your age as a percentage of salary (assuming you don't already have savings put away). So if you're 30, you should aim to save 15% of your salary for retirement. Why not follow David Bach's advice in How to Become an Automatic Millionaire?

Tax Relief

Don't forget that pensions are very tax efficient vehicles. Every 78p you pay into yours will be topped up to £1 by the taxman. And higher rate tax payers can claim back a further 18p via their tax returns. It's not often you can receive a return like that.

A good time to top up your pension is when you receive a bonus. Higher rate tax payers lose 40% – so a £5,000 bonus dwindles to just £3,000. But if you paid it into your pension, you keep the lot!

ISAs

Pensions aren't the only way to save for retirement (though if your employer offers one you should seriously consider participating). A good, low maintenance alternative is to save regularly into a low cost, index tracker ISA.

Its low charges mean that you keep more of your profit – so if a 30-year old were to save £200 each month until retiring at 65, he could have £344,000 (assuming 7% growth after charges again).

So, if you're concerned about your retirement plan, don't panic – follow these tips and start saving today!

You can find out more about saving for retirement in our Pension Centre.