Many people paying into a pension have no idea whether it will be enough. Plenty assume that paying in the minimum amount on their workplace pension will sustain them in retirement. For many people, it won’t.
Auto-enrolment has got millions of people saving, which is good news. But it started the habit without settling the amount. A pension that feels healthy at 35 can look thin at 55 if nobody has checked it against what you want to fund in retirement.
Part of the difficulty is that ‘enough’ means different things to different people. Your neighbour might be happy with paying off their house and buying a caravan in the Peak District. You might have your heart set on two long-haul holidays a year. Both are reasonable goals, but they need very different pension pots.
This article explains how to work out what you might need in retirement, add up what you’re on course to have and test the result. It also covers what to do if your numbers fall short, and how Glenrose Financial Planners can help.
Why it’s hard to tell if you’re saving enough
Pension statements are a poor guide to how you’re doing. They show how much you’ve got in your pot, and £180,000 can sound like a lot until you ask what it will pay you each year.
Most people can’t say, and your statement will rarely help you work it out.
Projections are only estimates. They rest on assumptions about investment growth, charges and inflation, and they’re usually built around a typical saver rather than you. A forecast of £300,000 will buy far less in 30 years’ time than it does now, because prices will have risen.
The automatic enrolment minimum adds to the confusion. It’s 8% of qualifying earnings, with at least 3% coming from your employer. Because it’s the official figure, people assume it’s the right one. In reality, it’s a starting point designed to get people saving, not a target designed to fund a particular lifestyle.
Many of us also have several pension pots scattered across old employers, each with its own statement, login and projection. Seeing the full picture takes some effort.
The way through is to work backwards. Start with the income you want, then work out what it will take to get you there.
Start with the income you want
Pensions UK’s Retirement Living Standards can give you a useful yardstick. They set out three levels of lifestyle in retirement.
A minimum retirement, covering all your essential needs with a little bit left over for fun, would need an annual pension of £13,900 for single person or £22,500 for a couple. A moderate retirement, offering more financial security and flexibility, would require £32,700 for one person and £45,400 for a couple. At the comfortable level, Pensions UK estimates you’d need about £45,400 a year as a single person or £62,700 as a couple. A comfortable retirement allows for more extensive travel, a newer car and help with home maintenance. Those figures assume you own your home outright, so if you’ll still have a mortgage or rent to pay, you’ll need more.
You should treat these standards as a guide, and ask a few questions to shape them around your own plans, including:
- How much do you expect to travel?
- Will you help children or grandchildren financially?
- Will you stay in Derbyshire, or move somewhere cheaper (or dearer)?
- Do you have hobbies that cost money?
If you’d rather start from your current spending, a common rule of thumb is to aim for about 70% of your pre-retirement income. This allows for costs that tend to fall, such as commuting and pension contributions, while leaving room for leisure and healthcare. On a £40,000 salary, you’d need a target income of around £28,000 a year.
For a more personal figure, build a simple retirement budget. List your essentials first, such as food, utilities, insurance, transport and council tax. Then add the extras, such as holidays, gifts and eating out. Include a buffer for the unexpected, such as a new boiler. The total is the number to aim for, which may be higher or lower than Pensions UK’s benchmarks.
Add up what you’re likely to have
Once you have your target in mind, list what you can expect to receive in retirement.
The State Pension is your foundation. The full new State Pension is £241.30 a week, or about £12,500 a year. You’ll need 35 qualifying years of National Insurance contributions to get it. You can check your forecast on the gov.uk website.
Next, gather all the info about your workplace and personal pensions. Look at the latest statement for each and try any online calculators your provider offers. If you’ve lost track of a pot from an old job, the Government’s pension tracing service can help you find it.
Then think about your other sources of income, such as ISAs or investments, rental properties, part-time work in retirement or any inheritance you can reasonably expect. Be cautious about counting on anything uncertain.
Now do the sums. Take your target income, subtract the state pension and any other reliable income. You’ll be left with the gap your pension pots need to fill. Using the 70% example:
- Target income: £28,000
- Less state pension: about £12,500
- Income needed from your pension and other sources: about £15,500
To turn that into a target pot size, if you plan to withdraw at 4%, you’d need around £387,500 to produce £15,500 a year. At 3%, you’d need closer to £517,000.
If your projected pot is close to your number, that’s encouraging. If it isn’t, the checks below will show you where you stand and what to do next:
1 – Look at the income, not just the pot
Your provider’s projection is a useful start. Check what growth rate it assumes, whether any charges are included and whether the figures are in current prices. Then look at the annual income it would provide and compare that with the gap you calculated. If the projection shows £9,000 a year and you need £15,500, you have a clear shortfall to address.
2 – Try a contribution rule of thumb
One popular guide is to halve the age you started saving and use that as the percentage of your salary to put away, including any employer contributions. So, if you start at 30, it suggests 15%. It assumes you’ll keep paying in at that rate until you retire. It can’t reflect your circumstances, so treat it as a rough marker, but it can quickly show if you’re a long way off.
3 – Check your National Insurance record
Any gaps in your record can reduce your state pension. Your forecast will show any missing years, which, in some cases, you can pay to fill. Each missing year can cost you about £350 a year in retirement. It’s worth doing early so you’re eligible for the full amount.
4 – Test different scenarios
Ask what would happen if you retired two years earlier, if the markets underperformed for a few years or if inflation ran higher than expected. A plan that only works when everything goes well isn’t much of a plan. Test each scenario its own, then together, to see how much breathing space you have.
5 – Review it at least once a year
Your circumstances change, and so do the rules. A pay rise, new job, house move or new grandchild can all shift the picture. So, review your plan regularly. Many people pick a fixed date, such as before the tax year ends on 5 April. Our article on how often to review your retirement plan covers the key trigger points.
What to do if you’re falling short?
Finding a gap is uncomfortable, but it’s far better to find it at 45 than at 64. Most gaps can be narrowed with a handful of sensible changes.
Increase your contributions. Even small rises can help, because the extra money has years to grow. One painless method is to put half of every pay rise into your pension, so you never miss it from your take-home pay.
Claim everything your employer offers. Some employers match higher contributions, and salary sacrifice arrangements can save both you and your employer National Insurance. If you’re not getting the full match, you’re turning down part of your pay.
Look at your timeline. Working two or three years longer gives your pot more time to grow and shortens the period it needs to last. Phased retirement, where you reduce your hours gradually, can also ease the transition.
Use your allowances. Higher-rate taxpayers can claim extra tax relief on pension contributions, and ISAs offer flexible, tax-free savings alongside your pension.
If you feel you’ve left it late, don’t write it off. Our article on the best age to start planning for retirement explains why acting now still makes a difference.
How can Glenrose help?
The honest answer to ‘am I saving enough?’ depends on your income, your plans and how your pensions are invested. Our financial advisers can take those pieces and give you a clear answer.
At Glenrose, we’ll look at your whole position, including your pensions, savings, property and other income. Then, we’ll model different retirement ages and spending levels, so you can see what each choice would mean in pounds and pence. If there’s a gap, we’ll show you the most effective ways to close it. We’ll explain your options in plain English, so you can decide with confidence.
Our advice doesn’t stop once your retirement plan is written. We’ll review your position regularly and adjust it when your life or the rules change, so you always know where you stand.
We’re based in Derby and work with local people at every stage of their planning, including new savers and those nearing retirement.
Book a consultation with one of our advisers to find out if your retirement savings are on track.