How much money do I need to retire in the UK?

The average single person in the UK has less than £1 million saved for retirement. This means they'll rely on their pension pot from working until they die.

There are three main ways to save for retirement: saving through your employer, investing in stocks and shares, and putting money into a personal pension plan. Find out how much you should be saving now to ensure you don't run out of cash later in life.

How much do people spend in retirement?

Pension and Lifetime Savings Association revealed that 77 percent of people don't know how much they're going to need in their golden years. Fortunately, the PLSA has calculated the average yearly costs for a single person and couple retirees who live outside of London.

According to the latest British government statistics (2021), couple's in the UK need a monthly income of at least £15,700 before they retire to be able to enjoy a comfortable life after retiring.

Going off this statistic alone that would put the minimum monthly pension income to (£15,700 / 12) £1308.33. So do you think you will have enough to retire? Will your pension pot be able to give you this income when it is needed?

How long will you need your pension?

The government says there is no upper age limit to claim a state pension, meaning anyone over 65 could start drawing benefits even though it won't be enough to live on. But how much money do you actually stand to gain from doing this? And what are the pros and cons of claiming a state pension?

You'll receive a monthly payment based on your final salary, taking into account how many years you worked. You'll also receive a lump sum once you reach retirement age. This depends on the amount of money you've paid into the scheme throughout your working life.

Your personal pension should provide you an income of around £9,500 per annum - although this figure is too low given the current costs of living.

A pension plan is a good way to supplement your state pension. Depending on the type of plan you choose, you could potentially earn up to 20% interest on your savings. However, you must make sure you understand the risks involved.

If you decide against saving for a pension, you could always use your state pension as a safety net. If you retire early, you won't lose anything because you haven't contributed to the fund. But if you delay retiring until later, you'll miss out on the potential earnings.

How much do you need to retire?

Planning ahead is key to having plenty of money to enjoy yourself once work stops being your main source of income. You don't want to run short of cash during those golden years, so it pays to know exactly how much you'll need to live comfortably.

If you are wanting to take your retirment into your own hands through investing in stocks or other assets, then you should aim to have 25 times the amount you wish to retire on annually. So let's take our figure from the start of this post (£15,700) and multiply that by 25.

This would put the minimum investment portfolio to £392,500, to provide an income of £15,700 without ever running out.

Annuity vs drawdown – what's the best option?

An annuity provides a guaranteed income stream for a set period of time, while a drawdown allows you to choose how much to withdraw each month. Which one is better? Deciding which way you want to receive your retirement savings is of course an important topic

Income Drawdown UK

Drawdowns can be used to build up a large nest egg quickly, but they come with a risk attached. The more you withdraw, the lower your eventual pay-out will be.

Withdrawing from your pension pot is risky, but it does mean you can access your funds whenever you like. It's important to remember that any withdrawals taken from your pension pot will reduce its value.

It's worth noting that some pensions offer both drawdown and annuities, which means you can get the best of both worlds.

Pension Annuity UK

An annuity is an arrangement in which a person agrees to pay money now for future payments. In return, the provider pays regular income to the beneficiary.

The advantage of an annuity is that it guarantees a certain level of income over a fixed period of time.

However, there are disadvantages to using an annuity. For example, you may not be able to change the terms of the contract at a later date. Also, you may find that the rate of interest offered is less than you expected.

Some people prefer to keep their money invested rather than relying on a monthly income. This is known as ‘self-invested personal pension’ (SIPP).

Private Pension vs Workplace Pension

A private pension is a type of pension usually set up by an individual where the individual chooses how much they contribute. 

A workplace pension is a form of employer funded pension scheme where employees contribute towards their pension and often, the employer will match the employees contributions up to a specified amount. This amount will vary business to business.

How much do I need to save into a pension at different ages?

This question gets asked all the time. The short answer: It depends.

It depends on how much you want to retire on, how much you are able to save and other perks such as how much your employer may contribute to your pension.

There is a rough rule of thumb to go buy though which many people use.

Starting at age 20, you should expect to be putting away 10% for retirement. This value should go up 5% for every 10 years until retirement. For example at age 30, you would contribute 15% to retirement and at age 40 you would contribute 20% to your retirement.

What is a comfortable retirement income for couples?

The average UK household spends nearly half of their monthly budget on food, according to research by MoneySupermarket.com. This equates to around £1,100 each month. With rising inflation, it is becoming increasingly difficult to save enough money for a comfortable retirement. In fact, saving just 10% of your income could mean you are missing out on thousands of pounds over the course of your working career.

According to research by the Office for National Statistics (ONS), couples in England and Wales need to earn an average of £46,000 per annum in order to retire comfortably. However, the amount needed varies depending on where you live. For example, couples in London need to earn £49,600 to reach this level. Those in Birmingham need to earn £45,300, while those in Manchester need to earn £43,200.

This figure includes savings, pension contributions and housing costs. If you do not make sufficient savings during your working career, you could find yourself struggling financially later in life. To ensure you don't run into financial problems, try to set aside some money every week towards your future. Saving regularly will allow you to build up a nest egg, which will give you more flexibility in later life.

If you're looking to boost your earnings, there are many ways you can increase your salary. You might consider taking part in a training programme or volunteering your skills to charities. Alternatively, you could look into starting your own side hustle - such as selling products online, offering dog walking services or even becoming a virtual assistant.

How to create a retirement income plan?

Cash flow modelling software helps you understand what your current financial position looks like, and how it could change over time. This way, you can make sure your retirement plan includes both short term goals and longer term goals.

Your retirement goal should be based upon your current situation, and how long you want to live. You'll need to consider things such as your age, health, lifestyle, savings, and investment returns.

Summary

I am not a financial advisor and anything I say in my blog is not to be taken as financial advise. For any financial advise please contact a financial professional. My blog is based on my own opinions, research and understanding of the financial markets.

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Thanks for reading

FAQ

How long will you need your pension?

The average 65-year old can expect to live for another 20 years, according to the latest government data. However, many people live much longer.

Source: pensionbee.com

How much can you save for retirement?

There's no limit to the amount you can pay into your pension, however there is a limit on the amount you can pay tax-free. You'll pay tax on any payments over this limit.

Source: pensionbee.com

How much should you save into your pension?

Many experts recommend this rule of thumb. It would mean if you start at 20, you should aim to be saving 10% of your annual income towards your pension. If you start when you turn 30, this would rise to 15% and so on.

Source: hsbc.co.uk