For many households, the challenge is not reaching a single number but steadily improving savings over time
Millions of people in the UK are heading for retirement with less money than needed to have a comfortable later life, and for many workers, the gap could be far wider than expected.
Analysis from investment platform AJ Bell shows that only a small minority are on track to build a pension capable of delivering a decent retirement.
One way of narrowing that shortfall would be to add an extra £10,000 to pension savings over the course of the new year.
The figure may seem daunting during a period of high living costs, but AJ Bell’s calculations show how even a short-term increase in saving can make a meaningful difference.
Tax relief, employer contributions and long-term investment growth all help boost the value of a pension over time.
Someone earning the average salary of around £35,000 who saves £10,000 a year from their 20s could retire with a pot of roughly £1.5m.
Starting in their 30s would build a pot just under £1m, while beginning in their 40s could still leave around £440,000.
Speaking to The i Paper, Tom Selby, director of public policy at AJ Bell, said: “One of the keys to building a pension pot that can deliver the lifestyle you want in retirement is to start as early as possible, making the most of the free money available through matched employer contributions, the upfront bonus of pension tax relief and the magic of compound growth over time.
“Saving an extra £10,000 a year for most people will be extremely challenging, but it’s worth spending some time looking at your monthly incomings and outgoings to assess whether you could be putting a bit more into your pension each month.”
How much is needed to retire
Figures from Pensions UK’s Retirement Living Standards show that a single person now needs around £31,700 a year for a moderate retirement income if housing costs are excluded, and about £43,900 a year for a comfortable lifestyle.
Official data also highlights wide disparities in pension wealth, with around 4.98 million people in the top 10 per cent of private pension savers holding roughly 64 per cent of all private pension wealth.
These figures underline how far many retirees are from achieving even a moderate standard of living, even with the state pension – currently £230.25 per week for those on the full new rate and £176.45 for those on the old basic rate.
The impact of early saving
Although £10,000 a year sounds like a large sum to save, most people would not need to fund the whole amount themselves because tax relief boosts contributions automatically.
When workers pay into a pension, they get tax relief at their marginal rate – so basic rate payers get 20 per cent tax relief, higher rate payers 40 per cent and additional rate payers 45 per cent.
For example, for basic-rate taxpayers, it means a £10,000 payment only costs £8,000. For higher-rate taxpayers, this reduces the effective cost to £6,000.
For a basic-rate taxpayer, this is around £667 a month, while higher-rate taxpayers would need roughly £500 a month.
Tax relief alone makes a substantial difference, and employer contributions under automatic enrolment further ease the burden.
Employers must offer a pension to anyone aged 22 or over who earns more than £10,000 a year.
Minimum contributions require employers to pay 3 per cent and employees 5 per cent unless they opt out.
On the average salary, this combination delivers around £2,300 into a pension each year. That includes £1,150 from the employee, £862 from the employer, and £288 from tax relief.
To reach £10,000 a year, an additional £7,700 is required. After tax relief, this equals a personal contribution of £6,160, or about £513 a month, which may be challenging for many households when bills and rent are taken into account – yet for others, it could be achievable.
Employer contributions make a difference
Selby explained that it is important to look beyond individual contributions.
He said: “The 3 per cent employer contribution for automatic enrolment is a minimum and plenty of firms offer more generous terms.
“If you receive a bonus or inherit some money, you could also consider contributing this to your pension.
“Provided any personal contributions remain below your annual earnings and you haven’t maxed out your £60,000 annual allowance, these should also benefit from pension tax relief of at least 20 per cent, with higher and additional-rate taxpayers able to claim extra relief from the taxman.”
Some employers pay more than the minimum, and some match employee contributions up to a limit, which reduces the burden on personal savings considerably.
For example, if an employer contributes 5 per cent instead of 3 per cent, the employee only needs to contribute 25 per cent of earnings instead of 27 per cent to reach the same total. That reduces monthly payments to £479, roughly £35 less than under the minimum arrangement.
Calculations from Brewin Dolphin show that a 30-year-old on the average salary could retire with £81,000 more if their employer contributed 5 per cent rather than 3 per cent. Someone starting at 40 could see £48,000 extra.
Selby added: “You should also consider workplace pension terms when taking on a new role or negotiating salary with your existing employer.”
Using bonuses and pay rises to boost saving
One-off payments such as bonuses can provide a relatively painless way to increase pension savings.
Contributions made via salary or bonus sacrifice go in before income tax and national insurance.
A basic-rate taxpayer who puts a £1,000 bonus into a pension would see the full amount invested, compared with only around £720 if it were taken as income, and the difference is even larger for higher-rate taxpayers.
Pay rises can be treated in the same way as diverting part or all of an increase into a pension, which allows contributions to grow without reducing take-home pay.
This is particularly useful when a pay rise would push earnings into the higher-rate tax band at £50,270.
Adjusting contributions in this way reduces taxable income while improving retirement outcomes.
Reaching a £1m pension pot
Building a £1m pension pot remains rare. Brewin Dolphin analysis shows people would need to save £389 a month from the age of 18, assuming 5 per cent annual growth, to reach that total by the age of 68.
Starting at 30 increases the monthly requirement to £755, highlighting the cost of delaying contributions.
Tax relief remains a strong incentive, though. Most people can receive relief on contributions up to £60,000 per tax year, including personal, employer, and Government payments, although the annual allowance is lower for those earning more than £260,000.
For many households, the challenge is not reaching a single number but steadily improving savings over time.
Selby said focusing on tax relief, employer support and taking opportunities to increase contributions can strengthen retirement finances, even if large payments are impossible.
He continued: “What you need will vary depending on your circumstances and any contribution to a pension, however small, is a good investment in your future self.”