The Office for National Statistics (ONS) has recently released a statistical bulletin concerning how people are saving for retirement which has revealed ongoing inequality in pension wealth with roughly 33% of respondents stating that they did not expect to have pension provisions beyond the state pension when they retired.
In summary, the bulletin has found the following:
- “Between April 2018 and March 2020, more people below State Pension age (57%) were actively saving for retirement using private pensions than before automatic enrolment was introduced in 2012 (43%); however, there was still much inequality in pensions wealth in Great Britain.
- Among working-aged people yet to retire, those who were self-employed (compared with employees), had a long-standing illness or disability (compared with no disability), or were from minority ethnic groups, had lower pension wealth on average than their counterparts because of lower participation rates and smaller pension pots.
- Almost a third of people did not expect to have any pension provision beyond the State Pension when they retired.
- Having low income or not working was the most common reason for not paying into a pension (54%); self-employed people were more likely to say they could not afford to contribute (39% versus 26% employees) or preferred alternative forms of saving (17% versus 9% employees).
- Among those approaching State Pension age and yet to retire, some groups had relatively low average wealth of any kind (for example, Black, Mixed or Other ethnic groups) while others had higher average net property wealth (for example, Asian and self-employed groups) that may offer an alternative source of income in retirement.”
It’s all too easy to put saving for your retirement to the back of your mind, especially if you have more immediate financial concerns. However, with pensions, the advice is always the earlier the better as it means you can save less each month than if you started at a later age.
Spending in your retirement years
In order to work out how much you need to save for retirement, you need to work out what your expenditure is likely to be. This will vary from person to person and the type of lifestyle you want in retirement.
As priorities change throughout retirement, expenditure will also alter. For instance, spending on holidays, eating out, and hobbies may be higher at the beginning of retirement and reduce as people get older, while expenditure on utility bills, health, and insurance premiums may increase.
Statistics released by Which?, which surveyed over 1,000 retirees to find out about retirement spending habits, showed that annual spending for a retired couple wanting a lifestyle to cover the essentials was a little over £19,000 per year. For a comfortable retirement, expenditure increased to £28,000 and for a luxurious retirement, expenditure was £45,000 each year.
For the essential lifestyle, expenditure covered the basics, for example, groceries, housing payments, insurances, transport, utilities, health, household goods, and clothes.
A comfortable lifestyle in retirement covered all the basic areas of expenditure, as well as some luxuries such as European holidays, hobbies, and eating out, while a luxurious retirement included long-haul holidays and a new car every five years.
Sources of income in retirement
The State Pension will form the backbone of retirement income for most people. The age at which you can access your State Pension is 66 but this will rise to 67 between 2026 and 2028.
For people who reached their State Pension age on or after the 6th April 2016, the full State Pension is currently £185.15 per week. The only circumstances in which a person can get more than the full State Pension is if:
- They have over a certain amount of Additional State Pension; or
- They defer (delay) taking their State Pension.
Assuming a couple is entitled to the maximum State Pension, this would provide more than £19,000 worth of income per year. You can obtain a State Pension forecast on the Government’s website if you are unsure what amount you would get.
On top of the State Pension, you may have private or occupational pensions. There are two types:
- Final salary (defined benefit); or
- Money purchase (defined contribution).
Final salary pensions provide you with a regular monthly income throughout your retirement and typically provide a spouse or dependent with a pension on your death. The amount you get is based on your earnings while you were working and the length of time you were working for the company that offered the final salary pension.
Money purchase pensions invest your and your employer’s contributions. The value of your pot at retirement is based on the amount of contributions paid and the investment return.
You can take money from a money purchase pension in a variety of ways, but most people choose income drawdown or an annuity.
An annuity provides you with a guaranteed income for the rest of your life, while there is more flexibility with income drawdown as you can take as much or as little from your pot whenever you want – although this flexibility comes with increased risks.
How much will I need in my pension pot?
For a 66-year-old married couple in good health, with a full state pension, if an annuity is the chosen route, they would require:
- A pension pot of £272,000 to receive the additional income on a joint life basis (paying a spouse’s pension of 50%) and increasing in line with the Retail Prices Index (RPI), with a min 10 year guaranteed payment period.
- If they selected a level annuity, i.e. one that does not increase each with inflation the pension pot required would reduce to £150,000.
- For a luxurious retirement, a pot of £800,000 would be required to generate an income of just over £25,500 on the same basis.
- Or for a level annuity the pension pot required would reduce to £440,000.
With drawdown, your money remains invested while taking withdrawals and, therefore, can potentially benefit from investment growth.
- Assuming the same couple lived to age 94, with withdrawals increasing by 3% each year and the drawdown pot growing by an annualised rate of 3% after fees, they would need a pot of £259,000 for a comfortable retirement and £772,000 for a luxurious retirement.
How much will I need to save into my pension?
Based on the figures above, it is possible to calculate what a couple would need to save each month to achieve a comfortable or luxurious retirement.
The calculations assume basic rate taxpayers, with an annualised 4% growth rate net of charges, and cover those who are just starting out on their journey to pension savings and those who have amassed some pension funds already, retiring at age 66.
- For a couple aged 30 with no pension savings, they would need to save £520 each month between them into a pension for a comfortable retirement or £350 per month if they already have a pension pot of £50,000.
- If the same couple delayed their retirement planning for a further 10 years, this would increase their monthly combined contributions from age 40 to £920 a month, assuming they had no previous pension provision.
The figures for a luxurious retirement are, understandably much higher.
While the figures may seem daunting at first glance, many people will already be saving for their retirement through a workplace pension under auto-enrolment rules. In addition, your salary should rise as you get older. Nonetheless, the earlier you start saving for a pension the better.
These figures are based on a number of assumptions and everyone will have different requirements in retirement.