Millions have no idea how much they need to save to enjoy their retirement, or how much pension income their pot will buy. Unless savers know what they are aiming for, they risk falling short and struggling in their final years.
At retirement, the average pension pot is £50,000 but men are in a better position, according to research from insurer Aegon.
They have a nest egg worth £73,600 in total, while the average woman has a meagre £24,900.
Worryingly, neither have anywhere near enough, warns Laith Khalaf, investment analysis at AJ Bell.
As a rule of thumb, you should look to draw three of four percent of your retirement savings as income each year. That way your nest egg should never run out.
If you had £50,000, that would generate income of between £1,500 to £2,000 a year, Khalaf said. “It’s not enough.”
If you retired at 66 on the new basic State Pension, you would get £9,339 a year currently. That £50,000 pension pot would lift your income to a maximum £11,339 a year.
This is well below the national living wage, which currently pays £17,143 a year.
Your first step is to find out where you stand now, so round up all your long-term savings, including company and personal pensions, tax-free Isa savings, Premium Bonds, and so on.
That will show how close you are to reaching your goal.
But how much pension do you need by the time you stop working? To fund a little fun in retirement, such as meals out and the odd foreign holiday, you should aim for £300,000 in total retirement savings, Khalaf said.
“That could generate an income of around £9,000 to £12,000 a year, on top of the State Pension, bringing you closer to £20,000.”
Naturally, you should aim to save more if you can, to really make the most of your final years, Khalaf added.
“The golden pensions rule is – save as much as you can, as early as you can.”
Here is another rule of thumb that can set you on the way to having a retirement to look forward to, rather than dread.
Khalaf said the percentage of salary you contribute into a pension should be roughly half the age you were at the time you started saving.
So if you started saving in a pension at age 22, you should invest roughly 11 percent of your salary.
By doing this, a 22-year-old on a £25,000 salary would build up around £300,000 by the time they reach State Pension age, which is likely to be 68, according to Aviva’s retirement calculator.
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Under that rule of thumb, somebody who didn’t start saving in a pension until age 30 should increase their contributions to 15 percent of salary. That sounds like a lot but you will get help along the way.
Under the auto-enrolment workplace pension scheme, employers are legally obliged to contribute a minimum three per cent of salary into your pension, and some generous employers pay in more.
You will also benefit from basic relief tax relief, worth one percent of salary, and must contribute another four percent yourself. In total, eight percent of your pay goes into the scheme.
This means you are doubling the value of your own contributions. If you opt out of the auto-enrolment scheme, you are turning down free money.
You also get tax relief on personal pension contributions. If you are a basic rate 20 percent taxpayer, each £100 of pension costs you just £80, while higher rate 40 percent taxpayers pay just £60 per £100 of pension.
Even if you do not hit that £300,000 target, saving something for your retirement is always better than doing nothing.