BLOG: How much should you be putting away for your retirement?
Once you’ve started thinking about retirement there are two key questions you need to ask:
- How much will I need to live off in retirement
- How much do I need to put away now to achieve that level of income?
How much will I spend in retirement?
Many people overestimate how much they’ll need to live on in retirement and assume that it will be similar to their current monthly expenditure. But while it is important to remember that certain monthly bills (such as utilities and food) remain, for many people big financial commitments such as your mortgage or childcare will no longer be a factor.
A general rule of thumb is that you’ll need between half and two-thirds of the final salary that you have when you are working to live on in retirement.
Consumer champion Which? recently calculated that couples hoping to retire comfortably should be aiming to have an income of around £25,000 per year, while those wanting to retire ‘luxuriously’ (enjoying long haul holidays and new cars, for example) would realistically need a pension that provided £40,000 a year. An individual pensioner would need £19,000 for a comfortable retirement and £30,000 for a luxurious one.
How much do I need to be contributing to my pension?
Of course, there are different standards and preferences that every retiree will be seeking but one thing is clear: the state pension of approximately £9,110 per year is unlikely to be enough for you to live well on.
So, you’re likely to benefit if you plan now for your retirement – but knowing how much you need to be paying into your pension can be tricky to calculate. The two main factors determining how much you need to be putting into your pension will be how old you are when you start and the age at which you plan to retire.
One way to build up your pension pot is to start early. But don’t worry if you didn’t start your pension at 18. If you’re still putting money away, you can take advantage of investing via compound returns.
But if you didn’t start at 18, and you don’t want to be working into your 70s, what are your options for boosting your retirement fund?
Ways to boost your retirement fund
Employer pension contributions can make workplace pensions an attractive option. The auto-enrolment rules mean all employers must now offer employees access to a pension. The employer pension contributions they make will, of course, enhance any contributions made by you.
Workplace pensions also offer tax advantages. Provided you contribute to the pension via the payroll, your contributions will be taken from your pre-tax salary, which means you’ll save all the income tax you would have paid on that money. This is known as ‘salary sacrifice’.
You can also set up a personal pension alongside your workplace pension scheme. Benefits may include easier access to information about how your investments are performing, freedom to increase, decrease, or pause payments, and greater control in terms of how your money is invested.
The pension provider will likely reclaim the basic rate of tax (20%) on your behalf and add it to your pension. This is called pension tax relief, but it’s helpful to think of it as free money from the government. If you contribute £100 to your pension, you will get £125 invested in your pot. If you’re a higher-rate or additional rate taxpayer, you can claim back any tax paid at the higher rate via your annual personal tax return.
Where to start
A pension calculator could help give you a clearer picture of how much you should be putting away for retirement as it will allow you to select your age, the size of your pension pot at the moment, monthly contributions and your target retirement date. You will then get an idea of whether or not you’re on track for the retirement you want.
If you’re getting closer to retirement and want to know if your planning so far means you’re still on track, a financial adviser could help to give you a more detailed view of your financial picture now and in the future.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A pension may not be right for everyone and tax rules may change in the future. If you are unsure if a pension is right for you, please seek financial advice. Our pension calculator is not a reliable indicator of future performance and is intended as an aid to decision-making, not a guarantee.
Kat Mann is savings and investment specialist at Nutmeg