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How big should my pension pot be?

27th April 2015

How big should my pension pot be?

Have you any idea how much money you will need to save to secure the kind of pension you would like to live on when you retire?

Anything from £12,000pa to 2/3 of your salary?

Everyone wants to save enough to ensure they have a comfortable retirement. But it's difficult to know just how much income you'll need as a pensioner.

Many experts are saying 2/3 of your income to live very comfortably (and maintain their lifestyle) and £12,000* for a very basic standard of living.

It's unlikely that you'll need as much money in retirement as you did while you were working.

We don't need 100% of our working-age income because we have normally paid off our mortgage and no longer have children to bring up. And, of course, we will have finished contributing to a pension and started to draw on it instead.

You'll need £220,000 (approx £12,000pa) for a minimum wage in retirement

According to past research from the advice firm Liberty SIPP and The Independent on Sunday the average person is facing a bleak retirement surviving on a private or company pension.

The survey, which is based on current rates of investment return, shows that to purchase an income equivalent to the national minimum wage - only £12,115 per year - we will need to save up a pension pot of £220,776.

However that is seven times higher than the (current) average pension pot that savers manage to scrimp together before their retirement.

We need to start saving!

“It's commonly known that many pensioners are on the breadline but when you think that the typical retirement income will be just one-seventh of the minimum wage, it relays the true extent of the problem we're dealing with. People need to start saving, and saving regularly, if they are to avoid pension poverty,”

John Fox, managing director of Liberty SIPP.

Most people completely underestimate both how long they will live in retirement and how much money they are going to need to live on.

People start saving too late

Tom McPhail, head of research at the advice firm Hargreaves Lansdown, said:

“Typically, people start saving too late, save too little and expect too much. Linking projected post-retirement income to current earnings makes sense as it helps to plan that transition from work to retirement.

“The other key question is when they can afford to retire. We anticipate that, within a few years, retirement at 70 will become the norm unless people plan ahead.”

Mr Fox's advice is that people need to start saving earlier, contribute more and / or retire later. He estimates that a 40year old needs to be contributing a minimum 11 per cent of their salary to earn the minimum wage in retirement, and that is presuming an optimistic average annual investment return of 5 per cent.

Is the Auto-enrolment and workplace pension provision too poor?

Concerns have been raised that insufficient pension savings are being put into new, auto-enrolment workplace pensions. For many, the scheme means some money is being put aside for retirement for the first time. But some say that contributions from employers are too small.

Auto enrolment, which started to be rolled out in October of 2012, has seen millions more people now holding a workplace pension scheme, but the contribution levels are so low as to barely address the issue.

Draw up a budget

To set your retirement budget, you'll need to get an idea of your current spending. Take three months' worth of bank and credit card statements, payslips going back three months and three months of shopping receipts.

Once you reach retirement your spending habits will change with your situation. You'll need to compare your new budget with how much income you'll be getting in retirement (from pensions, benefits or savings), to find out if there are any shortfalls.

Look at Annuity options

What is an Annuity?

Annuities convert your pension savings into an income that you've saved into. An annuity is a financial product that enables you to convert your pension savings into a regular income.

From April 2015 onwards you can withdraw as much of the money you want to that you've saved into your pension, once you reach 55. Be careful, it will be taxed as income.

Find out More about an Annuity income »

Pension Guides and Calculators

Numerous pension firms offer tools, guides and calculators to help you work out the desired pension income you'll need.

Retirement - How much will I need? Standard Life
Pension Pot Calculator This is Money
Pension Shortfall Calculator Money Advice Service
Retirement Calculator CNN Money

The purpose of calculators and tools is to act as a guide to help you understand the income you might need in order to fund the lifestyle you want.

Online tools won't take into account all your own circumstances. So if you want a more accurate figure, it makes sense to draw up a budget to get an better idea of the expenditure you expect to face in retirement.

*For a basic standard of living : Standard Life advise a yearly income of £12,100 (includes a 2 week annual holiday) and Liberty SIPP £12,115.

It's essential that you review your pension situation regularly. We can help you with taking steps to make it more certain that your pension pot will be able to achieve the income you want when you retire.

Let one of our advisers call you and talk you through your pension options.

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