This may come as a shock – if you live on the moon – but the basic State Pension will do little more than prevent you from starving in retirement. It gives you an income of just £8,546 a year, which means you need to save under your own steam as well.
Planning ahead
Many people are put off saving because they have no idea how much they should be setting aside for the future. There’s a simple answer to this question – as much as you can afford – but it’s not a very satisfying one, so I’ll try and be a bit more precise here.
Currently, a 65 year-old buying a single life annuity with £100,000 would get income of £5,426 a year from a best buy annuity, according to Hargreaves Lansdown. So to match the State Pension of £8,546 a year, that person would need a pension pot of £157,500, by my calculations. The State Pension may not offer riches but as you can see, you need a pretty hefty sum to match it.
Triple your money
Saving £157,500 would lift your total income from state and personal pension to £17,092 a year. You may not consider that enough. To create another £8,546 of income, you would need to save £315,000, which would lift your total income, including State Pension, to £25,638. Coincidentally, Aegon recently calculated that the average worker needs £300,000 in their pot to retire comfortably.
Ideally, you should aim to save more and, with luck, you’ll have other retirement income sources, such as a company pension.
So how much do you need to invest each month to achieve £157,500? The answer depends on variables such as your age and how fast your money grows. It’s our belief on the Motley Fool that for long-term savings, such as pensions or ISAs, your money will grow much faster in stocks and shares, rather than cash paying just 1% or 1.5%.
Begin young
So let’s say you do invest in the stock market and generate average growth of 6% a year, after charges. Let’s also say that you are starting from scratch (hopefully you’re not) and hope to retire at 66. If you’re 26, and therefore have 40 years to retirement, time is on your side (but don’t waste it). If you set aside £160 a month and it grows at 6% a year, you should hit that £315,000 target.
If you are 36 and only have 30 years, you need to save £315 a month. At age 46 you need to save £460 a month over 20 years. And at age 56, with just 10 years to go, that rises to a whopping £1,285 a month. The later you leave the harder it gets, because your contributions have so little time to roll up in value.
Light relief
That may look daunting. But remember that if you save in a personal pension you can claim tax relief, so each £100 of contribution only costs a basic rate taxpayer £80, and a higher rate taxpayer £60. So a 40% taxpayer aged 26 would only need to put aside £96 a month.
Yes, it’s all a bit daunting, but the longer you put it off, the harder it will get, so don’t hang around.
