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How Big Does My Pension Pot Need to be?

How much pension do I need

Pensions are one of the favoured ways for UK residents to save for their retirement, thanks to pension tax relief, contributions from employers, and the potential for investment returns on your retirement savings.

As you approach retirement age, you may start asking yourself: how much is enough to have a “good” pension pot?

No doubt you want to be sure you’ll have enough money to live the kind of life you want, but you also need to save in such a way that means your pension pot will last for the whole of your retirement.

The trouble is, it’s difficult to work out how much pension income you’ll actually need to retire and live comfortably.

There’s no one-size-fits-all approach that will give you a definitive figure, but it’s still equally important to know just how much income you’re going to need.

So, how do you go about working out what you’ll need from your pension pot?

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Your goals will determine how much money you need to retire

Realistically, your goals should determine how much retirement income you need to retire, rather than the other way around. In turn, this will decide how much you’ll need in pension savings.

What kind of retirement lifestyle do you want?

Ask yourself: what exactly do you want out of your retirement? What are your goals for when you reach retirement age?

An early retirement

You may have always wanted to retire early compared to the standard retirement age, making the most of your years after work.

Of course, to do this your pension pot will have to be able to support those extra years when you’re no longer working.

An expensive retirement

You may have always wanted to travel in your retirement, ideally going on long cruises to see as much of the world as possible.

If you’re targeting a more expensive retirement like this, you’ll need to make sure your pension pot can provide you with the level of income you’ll need.

A “comfortable” retirement

You may have no other goals other than to just spend time with your grandchildren while maintaining your current lifestyle.

You may go on a few holidays a year, or perhaps treat yourself to a new car. But otherwise, you’re content with simply having enough to live comfortably.

To live this kind of retirement, you’ll need slightly less in your pension pot compared to one of the more expensive strategies.

Your retirement will be personal to you

This list is far from exhaustive, as the kind of retirement you want will be personal to you.

But, no matter what your goals are, it’s the lifestyle you want that will determine how much retirement income you’ll need. In turn, this will tell you how big your pension pot needs to be.

How will you save towards your target retirement income?

Once you have an idea of what kind of retirement lifestyle you want, you can start looking at how far your pension plan currently goes in achieving your goals.

Workplace pensions

If you’ve ever been employed, your employer will likely have been legally obligated to offer you a workplace pension plan.

Your workplace scheme will be invested on your behalf by a pension manager, meaning the value of your pot has the potential to rise over time.

Your scheme will be one of two types: a “defined contribution” pension, or a “defined benefit” pension.

Defined contribution (DC) pensions

DC pensions’ value is set by the amount that’s put into the pension pot.

Under the current auto-enrolment rules, if you’re over the age of 22 and earn at least £10,000 a year, a minimum of 8% of your salary must go into your pension. Of that 8%, your employer must pay at least 3%, with the final 5% coming from you (including tax relief).

Yours and your employer’s contributions will be taken directly from your salary when you’re paid.

While DC pensions won’t give you a guaranteed income, they are a great way of saving for your retirement. You can increase your pension contributions as your earnings increase to ensure your pot will contain enough when you come to withdraw money from it.

Defined benefit (DB), or “final salary” pensions

DB pensions, also known as “final salary” pensions, function by giving you income for life, based on factors such as your annual income when you come to retire, and how many years you worked for your employer.

The upside of DB schemes is that your income is guaranteed. However, the downside is this figure is most likely fixed, and so it’s harder to take flexible amounts as your needs dictate.

DB schemes are quite rare these days, with most workplace schemes being DC.

Private pension pots

Private pension pots, also known as “personal pensions”, are invested by a pension manager in a range of investment classes, just like a workplace scheme.

You’ll receive tax relief on your contributions, as well as potential returns generated through the management of your investments.

The main difference between private or personal pensions and workplace pensions is that, while you can still receive investment growth and tax relief, you won’t receive employer pension contributions.

You also have more choice with a private or personal scheme, as you can choose from a range of pension providers.

If you’re self-employed, private pensions can be a great way to save for your retirement.

Best Personal Pension Providers for Self-Employed

Rank Provider We Like Go to Site
1 Penfold Pensions for Self Employed Penfold
The #1 one choice self-employed personal pensions in the UK
Visit Site
2 Pensionbee for Self-Employed PensionBee
A great choice for self-employed pensions with fully flexible options
Visit Site
3 Nutmeg Nutmeg
A favourite amongst self-employed pension seekers, with actively managed portfolios and 0% management fees for the first 6 months
Visit Site
4 Interactive Investor Pensions Interactive Investor
Open a SIPP before 31 March and pay no fee until October 2021
Visit Site

Self-invested personal pension (SIPP)

A SIPP works in a similar way to a personal pension, except that you’re able to choose your own investments across a range of shares, funds, and property.

If you’re concerned your workplace or personal pension won’t provide you with the amount you need to retire, a SIPP is a hands-on way to design a portfolio to boost your available retirement income.

Most investment houses offer a SIPP, including Hargreaves Lansdown, AJ Bell, and Interactive Investor.

Top SIPP Providers in the UK

Rank Pension Provider Description Link
1 Interactive Investor Interactive Investor is running a SIPP promotion where you don’t pay any fees for 6 months Open a SIPP
2 Hargreaves Lansdown Hargreaves Lansdown is a leading UK SIPP Provider for UK investors Open a SIPP
3 Fidelity Investments The SIPP from Fidelity is an easy way to start your pension as you can start with as little as just £50 per month, or with a lump sum of £1,000. The Fidelity typical service fee is a low-cost 0.35% plus ongoing charges. Open a SIPP
4 Pensionbee Pensionbee specialises in combining your existing pension schemes into one pension which you can then manage and contribute too in an easy to use interface. They offer a fantastic service for anyone who has accumulated different work pension schemes over a career. Please note you need to move at least one existing pension in order to use the service Transfer your Pension
5 Nutmeg A Personal Pension investment platform that marries the shiny new robo advisor platform with the trappings of a more traditional stockbroker. For new accounts, Nutmeg is offering 6 months 0% Portfolio Management Fees Open a Personal Pension
6 Saxo Markets Excellent, user friendly trading platform and extensive product portfolio
Visit Site
7 IG Investments Multiple options for funding and withdrawing money and great educational tools Visit Site
8 AJ Bell Youinvest One of the cheapest options for small and medium portfolios with an easy to use platform phone, ipad and laptop Visit Site
9 Freetrade SIPP With its recently launched SIPP, Freetrade is a great option for robo-advisor style, simple pensions Visit Site
10 Penfold Specifically aimed at self-employed people looking to start a new pension Visit Site
11 Moneyfarm Moneyfarm offer an easy to set up SIPP and you can transfer your pension to them too Visit Site
12 Moneybox You can track down your old workplace pension pots and combine them into one simple Moneybox Personal Pension Visit Site

Don’t forget about the State Pension

When you’re working out how much you’ll need to retire, don’t forget to include the money you’ll receive from the State Pension.

The State Pension provides a guaranteed income without any investment risk. So, while it may not provide you with income that directly meets your goals, it can help support you with some extra income for shopping and bills.

When will you receive the State Pension?

As of July 2021, the State Pension Age is 66. It will rise to 67 in 2028.

How much will you receive from the State Pension?

Under the new State Pension, as of the 2021/22 tax year, you’ll receive £179.60. That works out as £9,339 a year.

To receive the full amount, you need to have made 35 years of National Insurance Contributions (NICs) during your working life.

Which of these pension options will be right for me?

Your personal circumstances and goals will determine which of these options is best for you.

In all likelihood, your retirement income will come from a range of sources, including:

  • Workplace pensions from one or more employers
  • Personal pensions you have set up yourself
  • The State Pension
  • Any other savings or investments you have
  • Employment – you may decide to continue working part-time or on a consultancy basis when you retire.

Working out how much you need to save in pension contributions

Once you know what you want to achieve and how you plan to get there, you can start looking specifically at how big your pot will need to be.

The average UK pension pot

According to the Telegraph, the average person in the UK has a pension pot of £61,897.

Assuming a retirement age of 67, that would likely work out at around just £3,000 a year in income. Including the money you receive from the State Pension, the average UK adult has a retirement income of just over £12,000.

If you plan on living a fairly modest lifestyle in retirement, this might be enough to support you.

But, if you’re targeting a more expensive lifestyle, this may not be enough.

The 12% rule

One figure that’s often bandied about is the idea of saving 12% of your earnings into your pension pot.

However, investment house Hargreaves Lansdown doesn’t necessarily see this as a sufficient target. In fact, they argue that to achieve a “comfortable” retirement, you may need to be saving as much as 24% into your pension pot.

According to their figures, this would give you somewhere near £33,000 a year in retirement income.

Saving half your age

Another popular strategy is to save an equivalent percentage to half your age.

So for example, you should be saving 12% of your income into your pension aged 24. This should then rise to 15% aged 30, and so on.

This method means you start saving money earlier than you might have otherwise, giving your pension savings more time to make the most of potential investment growth.

Significantly, this figure obviously rises as you get older. This ensures you save even more of your money, meaning you’ll save the most money as you reach your greatest earning potential.

So, by the time you come to retire, you should have a built up a good pension pot.

Use a pension calculator

Realistically, as your goals will determine how much you need, how much a “good” pension pot is will be specific to you.

If you want a quick way to work out how much income you need to retire, you could use an online pension calculator.

These tools allow you to input all your income and outgoings, working out what your income will be.

It then gives you a clear, visual image of how much pension income you’ll likely need to retire.

There are many calculators available online, such as the government-backed Money Helper’s, formerly known as the Money Advice Service.

Taking financial advice

If you’re unsure how big your pot is going to need to be, you may want to take personalised pension advice from an independent financial advisor.

A financial advisor can provide you with personal advice for how much you’ll need to retire.

They’ll be able to use cashflow modelling to give you an accurate calculation of how much pension income you’ll need to live the lifestyle you want, alongside the rest of your money and assets.

Get a FREE Pension Review

Get a free no obligation pension review today from a qualified financial adviser.

Their impartial advice will include a retirement plan that will tell you how much you need to pay into your pension now so that you have enough income later when you retire.

Make sure you choose a qualified advisor who’s authorised and regulated by the Financial Conduct Authority (FCA).

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