Retirement is a milestone that many of us look forward to, but planning for it can be daunting. 77% of people in the UK do not know how much they need to retire, and just 20% are confident they are saving enough. With the cost of living on the rise and life expectancy increasing, it is more essential than ever to plan ahead to ensure that your retirement savings can support your lifestyle for the long term. So, how much do you need in order to live the perfect retirement?
Actually, the amount of money you’ll need to retire will vary depending on a range of factors, including desired lifestyle, age of retirement, and other sources of income available. This article breaks down how much you will need for the retirement you want.
Estimating your retirement needs
There is no one-size-fits-all answer to the question of how much you need to retire, but there are guidelines to help you estimate your target savings. A good starting point is considering the income you would need annually in retirement to maintain the lifestyle you want. The Pensions and Lifetime Savings Association (PLSA) has outlined three levels of annual retirement income for individuals and couples in the UK, known as the “Retirement Living Standards”:
“Minimum” standard of living
Single Person: £14,400
Covers all your needs, with some left over for fun.
| House: | Food: |
|---|---|
| DIY £100 a year to maintain the condition of your property. | Around £50 a week on groceries, £25 a month on food out of the home, £15 per fortnight on takeaways. |
| Transport: | Holidays & leisure: |
|---|---|
| No car, £10 per week on taxis, £100 per year on rail fares. | A week-long UK holiday. Basic TV and broadband plus a streaming service. |
| Clothing & personal: | Helping others: |
|---|---|
| Up to £630 for clothing and footwear each year. | £20 for each birthday and Christmas present. £50 a year on charity donations. |
Couple: £22,400
Covers all your needs, with some left over for fun.
| House: | Food: |
|---|---|
| DIY £100 a year to maintain the condition of your property. | Around £95 a week on groceries, £50 a month on food out of the home, £30 a month per couple on takeaways. |
| Transport: | Holidays & leisure: |
|---|---|
| No car, £15 per week for the couple on taxis, £100 per year per person on rail fares. | A week-long UK holiday. Basic TV and broadband plus a streaming service. |
| Clothing & personal: | Helping others: |
|---|---|
| Up to £630 for clothing and footwear each year. | Twelve gifts of £20 for birthdays, and the same amount for twelve Christmas presents. £50 per person a year on charity donations. |
“Moderate” standard of living
Single Person: £31,300
More financial security and flexibility.
| House: | Food: |
|---|---|
| Some help with maintenance and decorating each year. | Around £55 a week on groceries, £30 a month on food out of the home, £100 a month to take others out for a monthly meal. |
| Transport: | Holidays & leisure: |
|---|---|
| 3-year-old small car, replaced every 7 years, £20 a month on taxis, £100 per year on rail fares. | A fortnight 3* all-inclusive holiday in the Mediterranean and a long weekend break in the UK. Basic TV and broadband plus two streaming services. |
| Clothing & personal: | Helping others: |
|---|---|
| Up to £1,500 for clothing and footwear each year. | £30 for each birthday and Christmas present. £200 a year on charity donations, £1,000 for supporting family members e.g. paying for grandchildren activities. |
Couple: £43,100
More financial security and flexibility.
| House: | Food: |
|---|---|
| £500 a year to maintain the condition of your property, £300 contingency. | Around £100 a week on groceries, £60 a week per couple on food out of the home, £100 a month to take others out for a monthly meal. |
| Transport: | Holidays & leisure: |
|---|---|
| 3-year-old small car, replaced every 7 years, £20 a month on taxis per couple, £100 per year on rail fares per person. | A fortnight 3* all-inclusive holiday in the Mediterranean and a long weekend break in the UK. Basic TV and broadband plus two streaming services. |
| Clothing & personal: | Helping others: |
|---|---|
| Up to £1,500 for clothing and footwear each year. | Twelve gifts of £30 for each birthday, and the same amount for twelve Christmas presents. £200 per household a year on charity donations. £1,000 for supporting family members e.g. paying for grandchildren’s activities, treats, trips etc. |
“Comfortable” standard of living
Single Person: £43,100
More financial freedom and some luxuries.
| House: | Food: |
|---|---|
| Replace kitchen and bathroom every 10/15 years. | Around £70 a week on food, £40 a week on food out of the home, £100 a month to take others out for a monthly meal. |
| Transport: | Holidays & leisure: |
|---|---|
| 3-year-old small car, replaced every 7 years, £20 a month on taxis per couple, £200 per year on rail fares per person. | A fortnight 4* all-inclusive holiday in the Mediterranean with spending money, and three long weekend breaks in the UK. Extensive bundled broadband and TV subscriptions. |
| Clothing & personal: | Helping others: |
|---|---|
| Up to £1,500 for clothing and footwear each year. | £50 for each birthday and Christmas present, £25 per month on charity donations, and £1,000 for family support. |
Couple: £59,000
More financial freedom and some luxuries.
| House: | Food: |
|---|---|
| £600 a year to maintain the condition of your property, £300 contingency. | Around £130 a week on food, £80 a week per couple on food out of the home, £30 a week per couple on takeaways, and £100 a month to take others out for a monthly meal. |
| Transport: | Holidays & leisure: |
|---|---|
| 3-year-old small car, replaced every 5 years, £20 a month on taxis per couple, £200 per year on rail fares per person. | A fortnight 4* all-inclusive holiday in the Mediterranean and three long weekend breaks in the UK. Extensive bundled broadband and TV subscriptions. |
| Clothing & personal: | Helping others: |
|---|---|
| Up to £1,500 per person for clothing and footwear each year. | Twelve gifts of £50 for each birthday, and the same amount for twelve Christmas presents. £25 per person per month on charity donations. £1,000 for supporting family members e.g. paying for grandchildren’s activities, treats, trips etc. |
Reference: www.retirementlivingstandards.org.uk
Are your pension savings on track for retirement?
Knowing roughly what your retirement might cost is one part of the picture. Use our retirement readiness checker to see how your current defined contribution pension savings compare with the retirement lifestyle you would like. The result is an illustration based on the information you enter and a set of assumptions, rather than a personalised retirement plan.
Factors impacting retirement needs
To determine the amount of money you will need to retire with your ideal lifestyle, consider these factors:
1. Age of retirement
The earlier you retire, the longer your retirement savings need to last. If you plan to retire at the state pension age (currently 66, rising to 67 by the end of 2028), you may not need as much savings as someone who retires at 55 or 60. Early retirees need to ensure they have enough to bridge the gap until they can access their state pension and other benefits.
2. Lifestyle and expenditure
Your desired lifestyle will significantly influence how much you need to retire. Do you plan on travelling extensively, or are you content with staying closer to home? Will your mortgage be paid off by retirement, or will you still have housing costs? Consider your personal circumstances, such as any ongoing debt, private dental or healthcare costs, and plans for helping family members financially.
3. Inflation
Inflation erodes the purchasing power of your money over time, which means the amount you need today may not be sufficient in 20 or 30 years. A good retirement plan accounts for inflation by building in increases to your retirement income target. Historically, inflation in the UK has averaged around 2-3% each year, but recent years have seen much higher inflation rates. Make sure your investments and pension are indexed to inflation or adjusted regularly.
4. Longevity
On average, people in the UK now live longer than ever before. The Office for National Statistics estimated that a man aged 65 in 2020 can expect to live for around another 19.7 more years, while a woman can expect around 22 more years. However, many people live beyond the average, and it is therefore wise to plan for a longer retirement.
The importance of pensions
When planning for retirement, pensions play a vital role in ensuring financial security and stability. Pensions are essentially long-term savings plans designed to provide a regular income once you have stopped working, offering different options to suit various employment situations, saving goals and retirement needs.
To encourage people to save for retirement, the Government offers tax relief on pension contributions. For most people, tax relief is added to their pension by a Government top-up to their contributions. This top-up is “grossed-up” by 20% of the contribution that is made, so for a personal contribution of £10,000, a government top-up of £2,500 is added, bringing the total to £12,500.
How much can you contribute to a pension?
Personal pension contributions from salary are limited to “100% of your relevant UK earnings” – this simply means the amount of your salary. There is also currently a cap of £60,000 unless you have an unused allowance from previous tax years.
With personal contributions, a 20% top-up is added to the contribution by the Government and invested in your pension. So, if your salary is £60,000, you’d only need to contribute £48,000, then the Government would ‘top this up’ by adding the extra £12,000. It is the gross contribution that is assessed against the salary.
Workplace pensions
If you are a member of your company’s pension scheme, contributions are typically deducted from your salary and automatically paid into your pension pot. In most cases, you contribute a percentage of your earnings, with the rate depending on the type of pension scheme you’re part of.
Employer contributions
Employer contributions are a valuable boost to retirement savings and are a significant advantage of being part of a workplace pension scheme.
Many employers offer matching schemes, increasing their contributions if you contribute more than the minimum required. For example, if you contribute 6% of your salary instead of 5%, your employer may match that 6%, so 12% in total is added to your pension.
Taking full advantage of employer matching is one of the best ways to grow your pension faster.
Pension contributions for business owners
Contributions made to your pension from the company are not restricted by your earnings, and as a result, there is scope to make a larger contribution of up to £200,000 in 2024/25.
These contributions, made by the company, are typically considered an “allowable business expense”, potentially reducing the Corporation Tax bill by up to £50,000. For these contributions to qualify, they must be deemed reasonable and solely for business purposes. For example, a Managing Director contributing £50,000 to their pension may be seen as reasonable, while the same contribution from a part-time employee might not.
How to improve your retirement savings
If you are concerned that your retirement savings are falling short of your ideal amount, there are several strategies to boost your pension pot:
- Start early: The earlier you start saving, the more time your investments have to grow.
- Increase contributions: Try to contribute more than the minimum amount to your pension. Even a small increase in your monthly contribution can make a big difference over time.
- Maximise employer contributions: Some employers offer to match higher pension contributions – take full advantage of this if available.
- Review your investments: Make sure your pension investments align with your risk tolerance and retirement timeline. Younger savers may want to invest in higher-growth/higher-risk options for potentially higher returns, known as “growth assets”.
How can Abode Financial Planning help?
At Abode Financial Planning Cirencester, we understand that planning for retirement requires a lot of big decisions, and many people – especially younger generations – feel that those decisions are more a consideration for the future rather than the now. However, we believe in planning ahead and addressing these decisions sooner rather than later.
Our pension advice uses retirement planning software to build several scenarios that can assist in making you feel more confident and secure about your retirement years. Our professionals are highly knowledgeable about retirement, using added insight to contribute towards a healthier and wealthier lifestyle. Our services include:
- Stress-testing your investment portfolios using current and projected market data.
- Providing further investment guidance, helping you choose the right investment strategy based on your risk tolerance and timescales.
- Conducting existing pension reviews to clarify goals, assess performance, and determine suitability.
- Offering ongoing guidance to adjust your plan if circumstances change, such as through market fluctuations, personal life changes, or shifts in legislation.
- Identifying opportunities to increase your pension contributions, for example through employer matching schemes and government tax reliefs.
- Providing guidance on the options available to turn pension pots into retirement income.
- Assisting the structure of your retirement plan in the most tax-efficient manner, ie. through advice on withdrawing pension income to reduce tax liabilities.
Start planning for a more secure retirement today
Don’t put off your retirement plans any longer; the earlier you form a plan, the wealthier a lifestyle you’ll live when it is time to retire. If you are interested in receiving expert guidance, or you have any further questions about how we work, don’t hesitate to get in touch with us today!
Investment risk information
Please note, the value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
This information is for general information only and does not constitute advice. The information is aimed at retail clients only.
Past performance is not necessarily a guide to future performance.
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Read moreIndependent financial adviser Cirencester, financial advice for business owners and company directors in Cirencester
Abode Financial Advisers is an Independent Financial Adviser in Cirencester.
Abode Financial Advisers is a financial adviser based in Cirencester, Gloucestershire. Abode Financial Planning is an independent financial advice firm offering comprehensive financial planning services, including: independent financial advice, retirement planning, pension advice, investment advice, wealth management, and inheritance tax planning.
If you wish to discuss your situation, contact us for a no-obligation initial call, held at our expense. Call us on 01285 703 060.
Abode Financial Advisers is located at Watermoor Point, Watermoor Road, Cirencester, Gloucestershire, GL7 1LF.