Start saving now to gain your dream retirement

NOBODY wants to find themselves struggling for cash in retirement, and now we know what people need in order to enjoy life to the max after they stop working. As the Daily Express reported last week, couples need a pension worth at least £41,000 a year to live the retirement dream of exotic holidays, gym memberships and meals out. Single pensioners wanting to live the luxury lifestyle need £31,000.

Life can still be sweet if your income is lower, as a comfortable retirement with the odd short-haul trip and occasional bottle of decent wine costs couples £26,000 a year, or £19,000 for singletons.

To cover the bare essentials, couples need £18,000 a year combined, and singles just £13,000, according to new research from Which? That still leaves two questions begging: how much pension do you need to generate that income, and how much do you need to save to achieve it?

The Government and the savings industry have been working on a pensions dashboard, that aims to provide the answer to these questions, but it has been repeatedly delayed. The following numbers should add some clarity.

STATE OF PLAY

First, the good news.the new state pension can set you well on the way to achieving these target figures.this pays a maximum income of £179.60 a week which works out as £18,678 for couples, and £9,339 a year for singles.

To qualify for the full amount, you need to make 35 years of National Insurance contributions, said Canada Life technical director Andrew Tully: “Check your tally by requesting a state pension forecast, and consider making voluntary payments to plug any gaps.”

If a couple each gets the maximum state pension, they need to generate a further £7,322 a year to hit that £26,000 comfortable retirement income target set out by Which?, and £22,232 for the £41,000 “luxury” income.

Tully said the lower target would require a savings pot of around £115,000 in today’s money, rising to around £350,000 for the higher income. “This assumes you spend all your savings before you die and leave no legacy.”

Until recently, most retirees bought an annuity, which gave them a guaranteed income for life. If you want that security, you would require a larger pension pot of either £150,000 or £460,000,Tully said.

These days most pensioners leave their pot invested in the stock market, and take income as required via drawdown.

This should generate a higher return, but with more risk, as the value of savings will fall if there is a stock market crash.tully said: “In the worst case scenario, you could even deplete your pot before you die.”

START EARLY

All of these figures are in today’s terms. By the time you retire, you may need much more, especially if we get a lengthy bout of inflation, warns Tom Selby, senior analyst at wealth platform AJ Bell: “While these figures might sound impossible, the key is not to stick your head in the sand. Save as much as you can, as early as you can, to benefit from the magic of compound growth.”

Delaying just a few years can cost you dear.

At 35, you only need to save £75 a month for each £100,000 of pension pot you hope to achieve by age 67. By age 45, that figure has risen to £160, and to £450 a month by age 55, when retirement is just 12 years away.

These calculations assume that your money is mostly invested in shares and grows at 5 per cent a year on average after charges, and you increase your contributions by 3 per cent a year.

Selby said the Government helps out by granting generous tax relief on your pension contributions. “For basic rate taxpayers, each £100 costs you just £80 after tax, falling to £60 for basic higher rate taxpayers.”

If you have a workplace pension, you may already be well on the way to a comfortable retirement, especially if your employer matches contributions to your pot, Selby said, but do not take this for granted.

The auto-enrolment scheme has given more than 10 million low-paid workers a company pension for the first time, but it may not be enough on its own.

Scheme members contribute 4 per cent of their salary, with employers adding 3 per cent and tax relief a further 1 per cent. “This adds up to 8 per cent of earnings in total but still does not guarantee a luxury retirement, or even a comfortable one, so aim to save more,” Selby added.

‘Nobody ever complained about saving too much for their pension. Saving too little is the problem’

THE TWO-THIRDS RULE

What qualifies as a comfortable or luxury income ultimately depends on the individual, said Clare Reilly, chief engagement officer at savings firm Pensionbee. “As a rule of thumb, aim for a retirement income roughly two thirds of your current salary. So if you earn £30,000 a year, aim for £20,000, and so on.”

Reilly names one more general rule for pension happiness: “Save as much as you can afford.” Nobody ever complained about saving too much for their pension. It is saving too little that’s the problem.