How much you REALLY need to save for the retirement of your dreams – This is Money

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Millions of us slog away for decades in the expectation of a comfortable retirement one day.

But, in reality, many people in Britain are sleepwalking towards a nasty surprise in their dotage, with most of us failing to save enough for a proper pension.

So what can you do to make sure you don’t outlive your pension? Can you still count on collecting a state pension? And will even a £1 million pot be enough for you to give up work entirely?

Pension panic: Two in three workers admit they are not saving enough. One in three expects to work part-time to maintain their standard of living, while one in five is relying on their partner

Pension panic: Two in three workers admit they are not saving enough. One in three expects to work part-time to maintain their standard of living, while one in five is relying on their partner

Pension panic: Two in three workers admit they are not saving enough. One in three expects to work part-time to maintain their standard of living, while one in five is relying on their partner

This week, Money Mail is launching its comprehensive guide to help you prepare your finances for life after work. 

And our exclusive research reveals how making even small sacrifices today — giving up a regular cup of coffee on your way to work, for instance — could boost your pension pot by close to a third.

Calculations from insurer Royal London show that a 28-year-old worker starting on a £26,000 salary would amass a pension pot of £419,337 over 40 years, assuming they contribute 8 per cent of their salary, which rises by 3 per cent annually, and there are 5 per cent investment returns every year.

Yet by simply adding an extra £10 a week by dodging those ubiquitous coffee shops, they could bolster the same pot by 31 per cent to £550,380 over a 40-year career. 

If they skip spending £100 a month on takeaway meals and eating out, then they could bring their pot to £721,744.

And if they are able to sacrifice holidays abroad to save £2,500 a year, they could be sitting on a near £1.05 million fund by the age of 68.

Yet adding an extra £10 a week to your pension pot by dodging coffee shops, you could bolster it by 31% over a 40-year career

Yet adding an extra £10 a week to your pension pot by dodging coffee shops, you could bolster it by 31% over a 40-year career

Yet adding an extra £10 a week to your pension pot by dodging coffee shops, you could bolster it by 31% over a 40-year career

Helen Morrissey, pension specialist at Royal London, says: ‘Adding a small amount more to your pension every week from an early age could make a huge difference to your final pension pot. 

Every little bit really does help and the result could not only transform the way you live your retirement, but also influence when you can afford to stop working.’

Yet despite those startling figures, new research published today by workplace pension provider The People’s Pension found two in three workers admit they are not saving enough.

The poll reveals that one in three of us expects to carry on working part-time to maintain their standard of living, while one in five is relying on their partner’s pension or an inheritance windfall.

How big should a pension pot be?

Industry body the Pensions and Lifetime Savings Association (PLSA) recently published a set of ‘retirement living standards’ to give savers a clear idea of how much they will need.

The standards give a picture of the kind of lifestyle you might have on a minimum, moderate or comfortable level of income.

Currently, the life expectancy of a 65-year-old man is 18.6 years and a woman of the same age can expect to live another 21 years, meaning pension pots have to last roughly two decades

Currently, the life expectancy of a 65-year-old man is 18.6 years and a woman of the same age can expect to live another 21 years, meaning pension pots have to last roughly two decades

Currently, the life expectancy of a 65-year-old man is 18.6 years and a woman of the same age can expect to live another 21 years, meaning pension pots have to last roughly two decades

The minimum standard — an income of £10,000 a year for a single person or £16,000 for couples — means you will only be able to afford coach-trip holidays and will have to buy supermarket own-brand products. 

You also won’t be able to afford to run a car and will have to rely on your free bus pass.

Meanwhile, a moderate income of £20,000, or £30,000 for couples, will allow you to take a ten-night holiday in Europe every year and drive a second-hand Ford Focus.

And a comfortable retirement income of £33,000 — or £47,500 for couples — will allow you to splash out on £8 bottles of wine and spend £300 a month dining out. 

You will also be able to spend three weeks of the year holidaying in Europe.

Annuity rates slumped to a record low this year, meaning that a 65-year-old with a £50,000 pension pot will now receive an annual income of just £2,298.

This means a couple will need combined pension savings of well over £1 million to afford a ‘comfortable’ lifestyle. The income guidelines also assume that you will have paid off your mortgage.

Can i really save a £1million nest egg?

The lifetime allowance caps your total pension savings at £1.055 million before you are hit with punitive tax charges in retirement. 

To reach this daunting figure, a 25-year-old would have to put away £8,000 a year over 40 years, according to fund platform AJ Bell.

If they started saving for a pension ten years later, they would need to put away £14,000 a year.

Yet matched employer contributions and tax relief mean the saver might only need to pay in half from their own take-home pay.

Today’s poor annuity rates mean a £1 million fund would buy a healthy 65-year-old an inflation-linked income of £28,405 a year. This is less than the average salary in the UK of around £30,000.

Tom Selby, senior analyst at AJ Bell, says: ‘Becoming a pension millionaire isn’t as ridiculous a prospect as you might think.

‘If you start early, the combination of up-front tax relief and matched employer contributions means you can double your money even before investment growth is taken into account.’

Yet he warns: ‘Even with a £1 million pot, savers shouldn’t expect to be living in luxury in retirement.’

Alternatively, a retiree who kept a £1 million pot invested could gradually take out an inflation-adjusted income of £45,000 a year until they turned 100 — assuming a return of 5 per cent each year.

But this is not without risk, as their pension pay would be at the mercy of the stock market.

Can we count on a state pension 

Fewer than one in three of us is confident we will get a state pension from the Government when we retire. 

You currently need 35 years of National Insurance contribution credits to collect the new state pension of £8,767.20 a year. This extra income would cost £300,000 to buy as an annuity.

But the state pension age not long ago shifted to 66 for both men and women, and will rise again to 68 between 2044 and 2046.

A poll found only 28 per cent of under-35s and 35 per cent of those aged 35 to 54 think the state pension will still be around when they retire

A poll found only 28 per cent of under-35s and 35 per cent of those aged 35 to 54 think the state pension will still be around when they retire

A poll found only 28 per cent of under-35s and 35 per cent of those aged 35 to 54 think the state pension will still be around when they retire

This comes after Fifties-born women were made to wait to collect their state pensions when the age at which they were eligible was changed from 60 to 65. 

Think-tank the Centre for Social Justice has also controversially suggested the state pension age should eventually rise to 75 to take into consideration the nation’s improving health.

Experts have even predicted that the state pension could one day be means-tested.

Recent analysis from investment platform Hargreaves Lansdown has found most of us are not holding out any hope for retirement backed by government.

A poll found only 28 per cent of under-35s and 35 per cent of those aged 35 to 54 think the state pension will still be around when they retire.

Even 23 per cent of over-55s were not sure it would be around when they hit retirement.

Why some of us will never retire

If your pension pot isn’t up to it, you might find yourself having to keep working to ensure your lifestyle is affordable.

Working one or two days a week might be necessary to supplement your pension pay if your final pot is not enough for you to retire completely.

The number of people aged 70 and over who are still in work has hit a record high, more than doubling in a decade to nearly 500,000.

If you aim to have a total retirement income of £33,000 and get a part-time job earning you £10,000, you would need only a £23,000 annuity — currently £173,000 cheaper than one paying £33,000.

Some 45 per cent of workers expect to continue earning into their 70s, according to a recent study by investment management firm Fidelity International.

High price of living longer 

While our pension pots are straining, our life expectancy and health are both improving — meaning our retirement savings will have to last even longer.

The number of Britons aged 80 and over is expected to grow by 59 per cent to 5.2 million over the next 20 years, according to the Office for National Statistics (ONS).

The data also shows that 356,000 people born in the UK this year can expect to live to 100 — 26 times the number of people aged 100 and over today.

Currently, the life expectancy of a 65-year-old man is 18.6 years and a woman of the same age can expect to live another 21 years, meaning pension pots have to last roughly two decades. 

But many of us will have to make sure our retirement fund won’t run dry for at least three decades.

A healthy 65-year-old man could now buy a £33,000 annuity income to last 20 years from a pot of £573,000. He would need a £714,413 pot to buy the same income fixed for 25 years.

Tim Holmes, managing director at financial adviser Salisbury House Wealth (SHW), says: ‘For those who cannot afford to retire in their mid-60s, the only option is to keep working — which is not what many will have wanted to do during their golden years.’

b.wilkinson@dailymail.co.uk

 

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