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How much do I need to save for a decent retirement?

A recent survey by The Lolly showed one in four people want a £20,000 income in retirement. We've found out how much you need to save to make this happen.

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by Michelle McGagh on Apr 05, 2012 at 09:30

How much do I need to save for a decent retirement?

Saving for retirement is easy to put at the bottom of the to-do list but for every decade that you wait, you will have to double the amount you save in order to achieve a relatively modest pension.

A survey by The Lolly of 1,000 people showed a quarter of people would like a pension of £20,000 a year. This currently requires pension savings of around £300,000 to provide. And that's assuming you purchase the most basic annuity with your savings.

An annuity is a life insurance contract that you buy from an insurance company. In return for your pension savings the insurer agrees to pay you a pension for the rest of your life. How much that is depends partly on the type of annuity and how long the insurer expects you to live.

In the table below we've assumed a person buys a single life level annuity which has no protection against inflation and no continuing widow’s pension. As we will show, more generous annuities will cost you a lot more than £300,000.

How much do I need to save to get £300K?

It all depends on your age. The older you are the more you will have to put aside each month, and the difference is significant.

Figures from Standard Life show how much you will have to save each month if you start saving from the age of 20, from 30, from 40 and from 50. The table below shows two different growth rates for your savings of 5% and 7%. A 1% annual management charge has been factored in.

The higher the growth rate, which can be achieved through a riskier investment strategy, the less you will have to save each month.

For those starting at 20, 30 and 40-years-old a retirement age of 68 has been assumed.

Age start saving Growth @5% Growth @7%
20 £165.00 £90.00
30 £275.00 £170.00
40 £485.00 £350.00
50 £960.00 £785.00

The sums involved are already significant but if you want to buy an annuity that is more complex the amount you need to save shoots up again.

If you want an annuity that increases your income 3% a year in order to keep up with inflation, you would need a pension fund of £400,000. To achieve this, monthly payments would have to increase 33%.

To add a 50% widow’s pension, which means your spouse or partner would continue to receive half your monthly income payments on your death, you would need a fund of £330,000, a monthly payment increase of 10%.

And if you wanted your annuity to both keep up with inflation and provide a widow’s pension you would need a pension fund of £440,000. To get this you would have to increase your monthly payments by 45%.

Cost of delaying

The Pensions Policy Institute estimates that more than six out of 10 people aged 18 to 65 are not saving for retirement. Putting off saving for your financial future has a huge impact; every 10-year delay doubles the amounts you need to set aside to provide the target income.

Another way of looking at it is that every decade you delay saving halves your retirement income.

Julie Russell, head of customer relationships at Standard Life, said most people would struggle to live on the state pension, which the coalition is planning to increase to a £140-per-week flat rate from 2014/15.

‘The more we delay, the higher the monthly payments are going to be to provide the target income, which can make it very difficult to achieve. So the message is definitely start to save for your retirement as soon as you can and that will give you peace of mind now,’ she said.

Facing up to the reality

Shane Mullins (pictured), managing director of Fiscal Engineers, an independent advisory firm in Nottingham, said people needed to face the reality of living longer and poorer investment returns, and start saving for a pension earlier.

‘People think that [saving for retirement] is tomorrow’s problem and when they finally focus on it, it is too late and the rubber has already hit the road,’ said Mullins.

‘The financial situation we are in is not getting any better and you can’t rely on the state.’

Many people are putting off saving for a personal pension. A Prudential report shows one in six will retire with no pension and will rely on the state to fund their retirement but there is an equally big problem with people not saving enough.

Russell said people often underestimated the amount of money they would need to fund the lifestyle they want in retirement.

‘There is the concern that even those who are already investing in private pensions aren’t investing enough,’ she said.

‘People can find it difficult to work out exactly how much income they will need each year for retirement, but it is worth sitting down and estimating this in order to have an idea of the size of pension pot you need to build up and the contributions you need to make each month to achieve this.’

Mullins agreed that people should save more for their retirement and urged them to follow his four simple rules for financial success.

‘The reality is people should save a little, spend less than they earn, stick to a budget and remember that instant credit equals instant debt. Everyone needs the basis of a financial plan; these simple rules equal simple outcomes,’ he said.

Lifestyle changes

Jason Witcombe, a director of London-based independent advice firm Evolve Financial Planning, said the demise of the final salary pension scheme in the workplace would hit savers hard.

‘A massive problem that we are going to face is that final salary pensions are closing. [With final salary schemes] your retirement was sorted [but] that is all gone and it is not dawning on people how much they need to save just to get £20,000 a year [retirement income],’ said Witcombe.

He added that people start saving later in life, which cut the amount of time they have to build up a decent pension.

‘The trouble is you leave university with debt, you need to get rid of that, then you will need to save for a deposit [for a house] and then pay you mortgage off – there isn’t much time to save for retirement,’ he said.

14 comments so far. Why not have your say?

Paul Eden

Apr 05, 2012 at 11:38

There seems no real answer to this question for most people. Britain's state pension is not so generous as those in Australia (and I believe pensions are not taxed there), Germany or France. But there are many countries such as Korea where no state pension is available at all.

I would like to see greater flexibility in the introduction of the new flat-rate pension and people who can delay retirement till after the commencement of the new pension be given it.

So much money has been taken from the large number of existing pensioners in the past. There was the break with the link to earnings (Margaret Thatcher), and the raid on pensions orchestrated by Gordon Brown (that man is not the flower of the month for most people I think).

Now there is the effect of quantitative easing which has depressed rates payable to pension funds for purposes of annuties (I understand the present government contests this consequence of its policy). So much has been taken that I feel there should be the funds available to help people already retired. They should not be 'poor relations'...which is what they are under the present regime. I can understand their anger and that of people who only just miss the new pension.

So although the new flat-rate pension is an excellent idea and we do need to move towards such a scheme, there are serious shortcomings that disadvantage large numbers of people.

When people also look at the huge waste in government expenditure ie, the wars that it is so keen to get involved in, the £12billion cost of the NHS super dooper computer that cannot do the job, or the £10 billion cost of the two aircraft carriers that planes cannot fly off of! I have no doubt there is a great deal more waste. The overrseas aid that the government is intent on increasing (President Mugabe had a personal jet bought and paid for him from this overseas aid budget) and land rovers which he proceeded to use against his own population! No one is to blame for any of this and no one is accountable.

It is sad for pensioners and for other groups who need funding support such as children with cerebral palsy who need sometimes to go abroad for operations that are not available here.

So although the new flat-rate pension is to be welcomed, there is much that is wrong here.

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Jeremy Bosk

Apr 05, 2012 at 14:28

Only an idiot voluntarily buys an annuity. They are very poor value.

Agreed that many present pension scheme investors and annuitants made reasonable decisions based on past circumstances. Present circumstances are that nobody sane invests or saves in any vehicle subject to the misrule of politicians.

If you are young enough, emigrate beyond the reach of UK politicians.

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Apr 08, 2012 at 09:28

I think the calculation is a little more complex as to how much you need to save. On the positive side employers may match an employee's contributions up to a certain level and then there is the tax relief on the contributions. On the negative side one per cent for management fees suggests that the investments are in trackers. Even the much vaunted Vanguard UK tracker has been shown to cost 0.95%. If the contributor invests in an active fund then the cost will be 3%+. Surely this is an area where the Government should be focusing its attention in getting those costs down for people contributing to a pension. Research shows that the financial industry runs off with most of the gains on your contributions especially in the low growth environment we are in. But then they are a powerful group who influence Government policy. Come on Steve Webb, Pensions Minister do something useful for a change.

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Dislexic Landlord

Apr 08, 2012 at 09:32

So you want 20K pension and your and your 20 so you need to save in the region of £90.00

mmmmmmm so how much will 20k be worth in 47 or 48 years time you will need to save a great deal more than £90.00

The only winners on selling pensions is the Pension Company and the IFA,s who sell them (Ie THE EAST END BOYS IN WEST END SUITS)

Pensions are the biggest con unless you are a Higher Rate Tax Payer and your Employer is puting in a contrabution

Another thing I would imagin the folks who said they want 20K are most likley th avarage earners on about the avarage wage of 25k

If you look at an avarage worker retireing to day they will get a pension (OLD AGE) and all the other benifits such as Council Tax, Pension Credit, so every thing that is gained from a pesonal pension will be lost

I think personal pensions are totaly the wrong saveings product for a normal 25k earner you would be better off saveing in an Isa with none of the tie ins of a personal pension

You can take your money from an ISA Totaly Tax free at any time you wish you need the permison of no one

An IFA once told me that an ISA is a pension but instead of getting tax relife from the start you get it at the end

Dont get hung up on Personal Pensions they are not the be all and end all to solve the question of provideing for retirement

The main problem is education and to get workers to save if they can afford it

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Apr 08, 2012 at 09:49

So I save up £300,000, give it to an insurance company. which then gives me £20k a year. Allowing for them to make some interest on my £300K, I don't even break even till I reach 85.

And if you don't get as far as £250K, you will actually be no better off than someone who never saved a penny.

yes indeed, if we educated people about how nuch the government will take back if you do save, the vested interest would be very disappointed, as hardly anyone would save.

If you want people to save for a penion, stop robbing them when they do.

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Anonymous 1 needed this 'off the record'

Apr 08, 2012 at 10:13

I joined my company's DB pension scheme by default aged 25 in the 70's and worked there for 30 years. Then when tax rates were 60% (remember that?) I was putting 15% of earnings into AVCs rather than give it to the government. I was made redundant aged 55 with a £120K payoff and an RPI linked £26K pension. An IFA told me that I would have needed a pension pot of over £700K to achieve all this. My point is that for me everything fell into place without any planning, for my kids it's going to be a different story and even though they have good jobs I am helping them as much as I can with spare income.

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Apr 08, 2012 at 11:22

Just been through all this ! First decision you have to make on 'retirement' is how long are you likely to live ?? - Parent's ages, general health, mortality tables etc..I will probably live into my 90s...( I am 65) Then you can make some decisions...Currently for a flat annuity you will get c. 5.9 % ie for an initial pension of 20k p.a. you will need a pot of £ 339k.

RPI linked - c. 3.3% !! i.e. for an inflation proofed pension (starting at 20k ) you will need a pension pot of £ 606 k !!

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Andy Mann

Apr 08, 2012 at 13:58

Fixed annuity rates have fallen from an average of 15.6% in 1990 to 10% in 1997 to 5.8% in February 2012 for various reasons.....

Increased life expectancy.

QE gilt purchases have forced long-dated gilt yields down to historic lows.

Gordon Brown's abolition of dividend tax credits.

EU Gender-neutral annuity rates will lower men's annuity rates.

EU Solvency 2 increased capital requirements will lower annuity rates.

Apart from defined benefit and employer-assisted occupational schemes and higher-rate taxpayers, pensions look increasingly unattractive.

IMHO a workable alternative to annuities and draw-down schemes is required

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Apr 08, 2012 at 14:25

The 5% growth rate is an assumed average and by definition, 50% of you dudes, will have less than that. But do not worry, the supper rich are now paying less tax, grannies pay more and all will be well. .:-)

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Apr 08, 2012 at 14:55

What % of our saving pot goes to us and what % goes to the insurance co?

What would be the required payments if the insurance co. charged 0.5% instead of 0.5%

People are living longer etc, but the GDP per capita of this country has increased at a far higher rate. In spite of that, we have given up our free university education and defined pensions. Where did that extra wealth go?

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Apr 08, 2012 at 16:55

Too many variables for this article to make any sense.

The £20K you project for a 20 year old will need to be more like £80K allowing for inflation at a (miserly) 3% so you don't need to save £300K (or £400k or £440k) but four times that.

Company contributions, changes in government policy, etc., etc., etc..

Much better off using the £165 per month to pay off the mortgage early (you'll probably be paying more than 5%) and when the mortgage is paid off, think about the pension then. You'll be able to put far more away without affecting your lifestyle and build a meaningful pot in fewer years when you stand a better chance of predicting what the world will be like in your retirement.

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alan franklin

Apr 08, 2012 at 20:51

I made the great mistake of putting money into a company pension, which is now under the control of the government, who unilaterally cut it by a third this year. This is based on what the sum invested would fetch if I were stupid enough to buy governments bonds etc.

I would never advise putting money in a pension( and even less in a so-called annuity) as it is then out of your control and will be taxed out of existence on your death. Put cash instead in things you HAVE got control over- everything from property to gold and high interest bearing shares.

The tax our firm saved by shoving money in a pension for my wife and I was a primrose path to a tangle of red tape and so-called advisors I keep having to shell out for (although I am in the process of removing them and becoming the scheme administrator myself).

Be warned and learn from our error. Money can be provided in your retirement by different, better means.

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Apr 09, 2012 at 14:52

What is all this? Pension is about making provision for your future, I'm all for a safety net but that by right to be the bare minimum. It's really quite simple, I want a holiday, so do I save or bang it on the card? Society is currently punishing those who saved and worrying about those on the never-never, nonsense or what?

Anyone who goes through life blowing the lot and expecting the State to pick up the tab in old age should get what they deserve, the bare minimum.

Looking at this £20,000 in the sense your doing here is not really realistic. For a start the State [at the new £140 flat pension] will be covering £7280 pa. So we are talking about funding for less than £13000. I currently draw two pensions [both index-linked] which are about £12,000 net. This has been used to pay for my beloved children; first car, uni, wedding, contribution to a deposit etc. I also pour what I can into a SIPP. I'm 58 and will now need to work until at least 66. As my last child has just left home I will now bang all my existing pension payments into an ISA [although the cynic in me wonders how long that will remain tax free going forwards]. So never mind the government, allowing for the market swings, I will try and ensure I make the flexible income drawdown requirements.....and probably drop dead the year I retire ha ha but at least the family will be okay!

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Dislexic Landlord

Apr 10, 2012 at 11:16

FAO Alan Franklin

Im so glad you pointed out the faults with PP

You are so right 100%

Pensions are not the only way to save

The LIfe Companys are very good at makeing money for themselves there not Saints

I would like to see a life company that is paid on results ONLY of course you will never get it

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