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Want a minimum wage income in retirement? You'll need to save £130k
You may receive £7,500 a year from the state pension but will it be enough to live on?
by Michelle McGagh on Jan 16, 2013 at 15:10
The government hopes that by introducing a flat-rate state pension, Brits will be encouraged to save more for their retirement, but do you know just how much you would need to save to receive an income equivalent to the minimum wage in old age?
The single-tier £144-a-week state pension will provide an income of £7,500 a year. This isn’t a lot especially when you consider that two-thirds of salary is the excepted rule for a comfortable retirement.
However, many people are underestimating just how much they would need to save in order to live comfortably in old age. To build the £7,500 a year state pension up to even £12,000 a year – the equivalent to the national minimum wage – you would need to save £130,000 into a pension, according to figures from AJ Bell.
In order to match the state pension with private savings, to generate a total income of £15,000, you would need to save £210,000.
And you would need to save even more to generate a retirement income equivalent to the living wage of £16,400 as calculated by the Joseph Rowntree Foundation. Your pension pot would have to total £270,000 to top up the state pension to this amount.
AJ Bell marketing director Billy Mackay said the introduction of the flat-rate pension should not be an excuse not to save for retirement. He pointed out that the £144-a-week rate is the equivalent of just £3.84 an hour.
‘The proposed flat-rate pension makes it easier to plan for retirement and for savers to understand what they need to save, but it doesn’t remove the need to save.
‘You would need over £200,000 to fund the basic state pension if it didn’t exist, so this is a significant start. But £144-a-week is the equivalent of just £3.84 an hour – far below the minimum wage and well below the living wage.’
For savers who do not want to buy an annuity with their pension – essentially an insurance contract against living too long – there is the option of drawdown, where the pension pot remains invested and an income taken from it. However, Mackay said that in order to take advantage of drawdown a pensioner must have £20,000 of income, including the state pension.
‘The government insists on savers having an income of £20,000 per annum before they can opt for flexible drawdown. This suggests that they think you really need £20,000 a year to be confident of not having to rely on benefits,’ he said.
‘You need to build an additional pot of £380,000 to achieve that. These are big numbers so savers need to avoid the temptation to bury their head in the sand in the hope that the problem will somehow sort itself. The answer is to save what you can, from as early as you can, as effectively as you can.’
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