New data reveals the exact sum you need to save into your pension each month in order to retire comfortably. So, what is the magic figure? And what can you do if you’re falling behind on your pension savings? Let’s take a look.
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How big does your pension income need to be to retire in comfort?
According to Royal London, if you want to be comfortable when you retire, you’ll need an annual retirement income of £20,800.
If you’re happy with a basic retirement, however, then you’ll only need £10,900 per year. Meanwhile, a more luxurious retirement will require an annual income of £33,600.
Importantly, these figures take into account the State Pension. The full State Pension will soon be worth £9,628.50 (from April). It’s paid to those with at least 35 years of qualifying National Insurance contributions.
The State Pension age is currently 66, though it’s due to rise to 68 before 2039. Unlike a private pension which can run out, the State Pension – as long as you qualify for it – is paid until death.
How much do you need to save into a pension to enjoy a comfortable retirement?
How much you need to put into a pension will ultimately depend on how early you start saving.
Royal London suggests that if you begin contributing at age 22, you’ll need to stash away £355 every month in order to enjoy a ‘comfortable’ retirement income. That’s £20,800 by the age of 65.
However, if you don’t start saving into a pension until you’re 40, you’ll need to put away £690 each month to enjoy the same level of retirement income. This shows just how important it is to start saving into a pension as soon as you can.
Again, the £20,800 figure includes the full State Pension. It also assumes annual investment growth of 5%.
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What can you do if you’re not saving enough into a pension?
If you worry that you aren’t saving enough into a pension to be in line for a ‘comfortable’ retirement, there are a few things you can do to improve your situation.
1. Consider the age at which you want to retire
It’s worth asking yourself the age you would be happy to give up work and become a full-time retiree. The longer you can work (even just part-time) the smaller your pension pot will have to be.
Even though the State Pension age is currently 66 (soon to be 68), you could choose to work for longer than this.
2. Increase your private pension contributions
If you have a Defined Contribution Pension, then the more you save into it, the bigger your pot for retirement.
Many of these types of pensions are offered via auto-enrolment whereby your employer will match your contributions, up to a limit. The minimum you must contribute into an auto-enrolment pension is 8%, including employer contributions.
Yet even if your employer only matches your contributions up to 5%, you’re still allowed to contribute more than this. So, if you can contribute more, it’s often a good idea to do so.
3. Open a SIPP
A self-invested personal pension or SIPP is a pension where you can pick and choose investments yourself. Opening one can give your pension pot a boost if you’re already paying the maximum into your company scheme.
4. Consider a lifetime ISA
If you’re aged between 18 and 39, you can open a lifetime ISA. This product is offered by a range of providers and allows you to save up to £4,000 a year. The government then adds a 25% bonus to anything you have saved. This means it’s technically possible to bag up to £33,000 of ‘free money’ if you open an account aged 18 and pay in the maximum amount each year.
Anything you save into a lifetime ISA can be used either to buy your first home or to fund your retirement when you hit 60. However, if you want to access your cash before then, you’ll have to pay a withdrawal penalty. So do think carefully before opening this type of ISA.
For more information on using a lifetime ISA for retirement, take a look at our article that compares a lifetime ISA and a normal pension.
Keen for more pension-boosting tips? Take a look at The Motley Fool’s latest personal finance articles.
