What you need to dream of a comfortable retirement

A comfortable retirement and all that comes with that is something about which we all think about and dream.

But how to get there, and whether we’re squirrelling away enough today to achieve our goals tomorrow, usually are not at the forefront of our minds.

According to the latest projections from the Pensions and Lifetime Savings Association (PLSA), a trade body, someone who wants a “comfortable” retirement would need at least £37,300 a year (£54,500 for couples), to fund three weeks in Europe a year, theatre trips and regular beauty treatments.

The minimum income needed for basic living would be £12,800 a year, or £19,900 for a couple.

But knowing whether you’re on track for this or your future resources seem more sparse can be difficult.

Telegraph Money asked Aegon, the pensions firm, to work out how much someone would need to have saved to achieve an annual income of £37,300 post 68, when most young people today will receive their state pension.

Are you on track?

To hit this target, said Steven Cameron, of Aegon, on top of a full state pension, the retiree would need a pot worth £557,800 in today’s money. A saver starting at the age of 22 would need to make contributions of £490 a month, rising each year in line with earnings.

Mr Cameron said: “This may seem out of reach but your employer has to make a contribution to your workplace pension and some are prepared to match the employee pound for pound.”

This would reduce the cost to the individual to £245 a month. However, the generous tax relief offered by the Government on money put into a pension means a basic-rate taxpayer would need to save £196 from take-home pay, while a high-rate taxpayer would need to put away £147.

These figures assume that first, earnings and pension savings will grow by 3pc a year and the full state pension will grow with inflation. Similarly, the firm assumed the saver’s pot would grow 4.25pc a year after fees. It also assumed long term inflation would be 2pc a year.

We also asked Aegon to calculate how much needs to be saved by each age – in five-year intervals – to be “on track”. The results are in our table. Of course, late starters or those who have not saved at a high enough level could catch up by increasing contributions.

“If you’re already above age 22, and haven’t been making any pension provision, then you’ve got some catching up to do, and the older you are, the bigger the catch-up challenge,” said Mr Cameron. “It’s important to note that these are the fund values you’d need at each age along with an ongoing contribution of £490 a month increasing with earnings to be on track for that £37,300-a-year pension.”

The figures are all based on current annuity rates which are significantly higher than they have been in recent years. If annuity rates fall from current levels, you would need a larger fund to secure a £37,300 income.

However, most people take ad hoc or regular withdrawals from pension drawdown accounts, leaving the rest invested in the stock market.

Wealth manager Quilter estimates that a 66-year-old on full state pension drawing down their private pot would need £450,000, which would be exhausted by age 88.

This is far less than what you would need if buying an annuity, and gives you the flexibility of passing it on.