If you have no idea whether you are saving enough to just scrape by or if you’ll enjoy a prosperous retirement, you are far from alone.
Many of us take comfort in that fact we’ve been automatically opted into a string of work pensions – but have no clue whether these funds will actually deliver a decent income in old age.
Even if you log in to see how much you have in your pension pot, it can be tricky to know if you’re setting enough aside and what kind of life that will afford you in retirement.
We asked experts to crunch the numbers so you can see if you’re on track for the retirement of your dreams.
Here’s how much you should aim to have in your pension for each decade of your life, from your 20s until your 60s, if you want a sensible sum to live on after you stop working.
We’ve also asked financial professionals what you can do if you find you’re falling behind.
Being mortgage-free by retirement age will substantially reduce the income you need in retirement (picture posed by models)
HOW MUCH WILL YOU NEED IN RETIREMENT?
A single person needs an income of £31,700 a year for a decent retirement, according to a widely used pension industry benchmark from trade group Pensions UK.
This ‘moderate’ lifestyle covers the essentials plus some splashing out on food and entertainment, trips abroad and running a car.
Couples need a joint income of £43,900 to meet this ‘moderate’ lifestyle, according to the annual Retirement Living Standards, and should bear in mind they will be able to afford retirement more easily with two state pensions and greater combined purchasing power.
The very minimum a single person needs to get by is £13,400 a year and £21,600 for a couple, while they need an income of £43,900 and £60,600, respectively, for an affluent lifestyle.
But these headline targets don’t include some very important items, which should be factored in, such as income tax, housing costs if you are still paying a mortgage or rent and care costs in later life.
You should also consider the fact that people’s lifestyles change as they age. You might want to aim for a comfortable income in the early more active stage, but only need a more basic income later on.
Pensions UK compiles its report based on surveys about people’s ambitions for retirement, and the current prices of different baskets of goods and services like food and drink, transport, holidays, clothes and social outings.
So, how much do you need to have saved in your pension by retirement age to be able to generate the ‘moderate’ income of £31,700 a year?
For this calculation, we looked at how much it would cost to buy this income in the form of an annuity to guarantee payouts for life.
You need a pension pot of around £325,000 by age 66, adjusted for inflation, to be able to afford a moderate standard of living, according to annuity provider Standard Life.
This assumes you need an income of £36,483 before tax and accounts for the fact that you would receive a full state pension, currently worth £11,975 a year.
Standard Life also factored in investment growth of 5pc, inflation of 2pc and an annual investment charge of 0.75pc. This is possible for someone starting out on a salary of £25,000 at age 22, assuming salary growth of 3.5 pc.
Note, that if you choose not to buy an annuity and instead opt to leave your pension invested and draw from your pot as and when you need it, you may not need quite as much by retirement age.
This is because, if you invest wisely, your fund can continue to grow during retirement, although there is a risk of running out of money if financial markets fall or you spend beyond your means.
People also often use property – via buy to let, equity release or downsizing – and other investments to fund retirement.
20s: TARGET £11,000
Retirement may seem a long way off if you’re in your 20s, but modest savings early on can make an enormous difference later on.
If you want to guarantee yourself a decent retirement and amass £325,000 in your pension pot by age 66, you should aim to save £11,000 in your 20s.
This may sound like a relatively small sum when your ultimate goal is to save hundreds of thousands of pounds. Yet, it will seem a small fortune to a young person in a first or second job, with many financial demands on them.
If you want to pay rent, run a car, socialise and simply enjoy young adulthood, putting aside that amount might seem impossible.
But you will not be responsible for the entire sum, because whatever you put in gets a significant boost in contributions from your employer and tax relief from the Government at your marginal rate.
Charlotte Ransom, chief executive of wealth planning group Netwealth, says: ‘Starting your retirement savings in your 20s might feel crazy – it seems a lifetime away’
Also, every pound you manage to put into a pension when you are young is incredibly valuable because it will snowball thanks to ‘compound interest’.
In your 20s, you are in the enviable position of benefiting hugely from compound interest, which is one of the most effective tools of wealth creation, according to Les Cameron, of pension firm M&G.
He says: ‘This means you earn interest on the interest you make, so the longer you invest the more your money works for you.’
Cameron says you should join your workplace pension as early as possible if you start a job in your late teens or early 20s, without waiting until you are auto-enrolled at age 22.
Employees are not automatically signed up to their company pension until age 22, at which point they will pay a minimum of 5pc into their pot including tax relief, while employers must pay 3pc.
Charlotte Ransom, chief executive of wealth planning group Netwealth, says: ‘Starting your retirement savings in your 20s might feel crazy – it seems a lifetime away.’
But she urges: ‘Future you will thank you for starting early. The compounding accelerates exponentially, more of your pot exists for longer and growth on employer contributions amplifies the effect.’
30s: TARGET £55,000
You might have a higher salary as pay rises and promotions start rolling in, but the financial demands you face are only likely to grow during this decade.
Even if you don’t get married and start a family, you might be looking to buy a home and will then have to keep up with mortgage payments.
But you should aim to grow your pension savings to a total £55,000 by your mid-30s, according to Standard Life.
Mike Ambery, retirement savings director at Standard Life, says: ‘Your 30s are a key decade for pension growth as salaries typically rise. Consider increasing your contributions when a pay rise kicks in – you might never notice the difference.
Mike Ambery, retirement savings director at Standard Life, says: ‘Your 30s are a key decade for pension growth as salaries typically rise’
‘It’s good to start thinking more seriously about the importance of not relying on minimum auto-enrolment contributions – for most, they won’t be enough to keep you on track for your expected standard of living in retirement.’
Cameron says your 30s are about building momentum, so make sure you are maximising contributions.
Some employers are willing to contribute more than the minimum if you do the same, matching your savings up to 6pc or more. Some go even further, offering contributions of 15pc. This is known as the employer match and can significantly boost your pension pot over the long run.
Cameron adds: ‘Check your scheme rules and take full advantage of any matching offer. You’re still young enough for compound interest to work its magic, but now is the time to make sure your pension contributions grow with your career.’
40s: TARGET £117,000
Your 40s are a good point to take stock of your pension savings because there’s still plenty of time to fix a shortfall.
Experts say you should track down all the pensions you’ve saved into from previous jobs, consider merging them, if it makes sense – check charges and any valuable guarantees first – and look at your state pension forecast.
You need 35 years of National Insurance contributions to qualify for a full state pension. Check your forecast at: gov.uk/check-state-pension.
To be on track for a £325,000 pension pot by age 66, you will need to grow your pension wealth to £117,000 during this decade of your life.
Ransom says: ‘By the time you get to your 40s, you might find you’ve got a bit more spare cash than you did in your 20s and 30s.
‘Once you’ve made the most of your pension contributions, a really sensible next step is to top up your Isa. Isas are great because your investments grow completely tax free and, unlike pensions, you can dip into the money whenever you need it.’
50s: TARGET £201,000
By your mid-50s, you should have £201,000 set aside in pension savings if you want to be on track for a modest retirement, according to Standard Life.
This may seem like a big jump from your 40s – with the target almost doubling. However, you will be in your peak earning years, which means you (and your employer) will automatically be setting aside more than ever before.
While perhaps it’s too soon for a firm plan, you can start thinking about when you want to take retirement and how to build your finances towards that date.
The state pension age will rise to 67 between April 2026 and 2028, and the age you can access private and work pensions will jump from 55 to 57 in April 2028.
Ambery says: ‘If you want to retire early, think about how many years you might need to bridge between when you want to retire and when your state pension kicks in.’
He says you should also review how your pension is invested to make sure this matches your risk tolerance and retirement plans.
Many people are automatically ‘defaulted’ into a little-known investment strategy called ‘lifestyling’ in the run-up to retirement.
It means pots are ‘derisked’ by being shifted out of stock markets and all or part way invested back into government or corporate bonds, which are typically deemed less risky. The idea is to protect savers against abrupt market downturns when they are just about to start tapping their pensions.
Anyone who wants to keep their pension fund invested for decades during retirement should consider opting out of ‘lifestyling’ and sticking with stocks, which are riskier but have more potential to grow.
But your pension won’t be your only financial priority at this stage. Cameron says: ‘Ideally, you want to enter retirement debt free so, if possible, use your 50s to clear your mortgage and any loans before you stop working.
‘Being mortgage free by retirement age will substantially reduce the income you need in retirement. If possible, consider directing some money to extra mortgage payments while still contributing enough to your pension.’
Standard Life’s calculations suggest you should target saving £253,000 by the end of your 50s, if you want to retire at 66 with a £325,000 fund.
WHAT TO DO IF YOU’RE RUNNING BEHIND
If you check your pension statement and find that you are behind these milestone targets, the action you need to take will depend on your age.
If your 20s were a lost decade in terms of pension savings, then that’s a shame, but it just means you need to get serious in your 30s. Consider upping your contributions when you receive any pay rises or bonuses.
The older you are, the harder it will be to catch up but it is still possible. You will need to maximise the amount you pay into your pension as retirement nears.
Find out if your employer will make higher contributions if you put more in – this is a great source of extra free cash. Even if you don’t have a generous employer, upping your own contributions will get you more tax relief.
If you receive an inheritance, you can look into making a one-off top-up to your pension. But be mindful of the annual allowance, the maximum amount you can put into your pension every year and qualify for tax relief.
For most people, except very high earners, this is £60,000, or up to 100pc of your annual earnings if they are lower. This includes your own and your employer’s contributions into a pension, as well as the tax relief you receive.
However, one very useful perk of the annual allowance is that you can still benefit from any unused allowance over the three previous tax years, under certain conditions. You need to use up the current year’s allowance first and have set up a pension already to qualify.