If you are a long way off retirement, it’s hard to picture what the financial landscape will be like when you finally finish working – but many of us may need a lot more in our pension pot than we realise
Millions of working Brits are saving into a pension scheme for their retirement – but how much exactly should we be putting away?
The age at which we start saving into a pension scheme is getting younger. Currently, working Brits aged 22 years are automatically enrolled into a workplace pension. This will eventually drop to 18. When we retire, we would all like to think our pension savings will give us a comfortable life in our golden years – but with the cost of living continuing to rise, we will likely need a lot more in our savings pot to match that reality.
If you are a long way off retirement, it’s hard to picture what the financial landscape will be like when you finally finish working, so these figures do need to be taken with a pinch of salt. However, based on things right now, to have a “moderate” standard of living in your retirement you will need to have an average pension income of £23,300 a year according to current data from the Pensions and Lifetime Savings Association.
Based on this, financial experts at Hargreaves Lansdown say you will need to have a pension pot worth around £200,000. This would give you an annual income of about £12,700 from your personal and workplace pensions. This figure is based on you saving into a defined contribution pension. This is where the value depends on how much you have paid in and how your investments have performed. It is based on you also getting the full new state pension too which currently sites at £11,500 a year.
So with £200,000 being the benchmark, how much should you have in your pension pot right now? If you are 22 years old and starting to save for your pension for the first time, Hargreaves Lansdown said you should be putting £282.89 into your pension pot each month to have £200,000 by the time you are the current state pension age of 66 – this assumes your contributions stay the same throughout your working life.
By the time you reach 32, your pension savings should be sat at around £35,322 in your pension pot. Again, this assumes your pension investments grow by 5% each year. After another ten years, at the age of 42, your pension pot would then be worth £74,626 and by 52, the pot should have grown to £120,216. Finally, with your contributions remaining the same and your pot growing by 5%, you should reach £174,866 by the time you are 62.
With the state pension age at 66 – rising to 67 between 2026 and 2028 – you will have another four or five years to grow your pot even further and by this point you will be on track to hit the £200,000 figure before you retire. Hargreaves Lansdown says the earlier you start saving for your pension, the better. This is because if you start saving later in life then your monthly contributions will need to be higher to reach the £200,000 target than if you had started when you were younger. This is also because your pension investments won’t have had as long to grow.
According to Hargreaves Lansdown’s figures, if you start saving into your pension at 22, you would need £283 a month to get a £200,000 pot by 66. However, if you don’t start until you are 32 then you will need to put in £402 a month to get the same size pension. If you leave it until 42, you contributions would need to be £615 a month. If you wait even later and only start contributing at 52 – just 14 years away from a retirement age of 66 – you would need to contribute £1,122 a month. Again, these figures assume your contributions stay the same until you are 66 and that your investments grow by 5% a year.
If you want to work out how much you should be contributing each month to your pension pot, Hargeaves Landown says there is a “rule of thumb” you can follow. You should take the age you start contributing, half that number and add a percentage sign to it. That tells you how much of your salary you should contribute each year for the rest of your working life. For example, if you start contributing at the age of 24, you will need to pay 12% of your earnings each year.
How much pension savings should you have in your 30s, 40s, 50s, and 60s?
- Age 32 – £35,322
- Age 42 – £74,626
- Age 52 – £120,216
- Age 62 – £174,866
