This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your financial adviser here at Vesta Wealth in Cumbria, Teesside and across the North of England.
What is a good-sized pension pot and how much should you be setting aside regularly for retirement? Sadly, most people in the UK are unaware that their current savings trajectory will not allow for a comfortable retirement. Many also do not know how many pensions they have and how much is in each of them. In this article, we offer some thoughts on how to gauge the amount you may need for retirement.
We hope you find this content useful and invite any questions you may have about how this could affect your retirement planning, via:
t: 01228 210 137
e: [email protected]
Different methods for estimation
At least two factors make it difficult to provide a universal answer to the question of how much you need to save for retirement. Firstly, everyone’s financial goals and situation is different. You may have fairly modest lifestyle goals for the future and have already accumulated significant wealth and savings. In which case, you may need to save little from this point. For others, their goal may be to attain a luxurious retirement but have not started contributing to a pension yet.
Secondly, there are different ways to estimate how much you may need in 10, 20 or 30+ years for retirement. Some studies advocate the ‘Rule of 7’ which suggests you may require at least 7x your annual income once you turn age 68. So, an employee on £30,000 per year would require at least £210,000 in their pension pot one day, under this approach. Others argue that workers should be committing at least 13% of their salary towards retirement savings from the age of 25, whilst another benchmark is to suggest aiming for 2/3rds of your current salary as an annual retirement income.
For our financial advisers, however, there is at least one principle that is universal for people across Cumbria, Teesside and the North of England – the sooner you start saving and planning, the better.
How tax relief and compound interest helps
With the crucial caveat that no case is the same, it’s likely that (in today’s money) you will need at least a few hundred thousand pounds saved towards retirement – e.g. £200,000-£500,000. Remember that, with today’s increased average lifespans, retirement could last a long time, maybe 30+ years. So, you’ll need a decent sum in order to provide an annual income of tens of thousands of pounds, throughout this time.
For many, these figures might seem impossible to aim for on the surface, yet there is good news. In the present tax year (2020-21), very attractive tax reliefs can help grow your pension pot. For basic rate taxpayers, every £8 you contribute to a pension is ‘topped up’ by another £2 through tax relief. For those on the higher rate, you can put in £6 and get £4. Over time, this has the power to dramatically grow the size of your pot, perhaps by tens of thousands of pounds, or more.
The other great advantage of starting a serious pension plan earlier in life is that you can leverage the power of compound interest to grow your pension savings even further. This ‘interest on interest’ means that the longer your pension money is invested, the better off you’re likely to be. For instance, if you put £10,000 into a regular savings account and leave it there for 20 years, if the current interest rates stay the same (say, 1%), then your savings could grow to £12,201 by the end of this period (although, in real terms, the sum would likely be worth much less due to inflation). However, imagine in another scenario where you invest the £10,000 (e.g. in stocks and bonds) which produces an average annual return of 6% over 40 years, after fees. By the time you retire, this one lump sum could have grown to £102,857, with nearly £93,000 generated from the effects of compound interest.
Crafting a plan
Of course, retirement planning is rarely as simple as putting £10,000 into an investment account and leaving it for 30-40 years, although it would likely help! For most people, building a strong retirement fund will require a long-term strategy involving regular, smaller contributions. The key issues here will be ensuring that the saver sets enough aside regularly, as early as possible, and that the savings are placed into investments which generate strong performance and avoid excessive fees.
The precise amount you may need to save into a pension will vary depending on factors such as your age, your attitude to risk and future retirement goals. This will be important to discuss with your financial adviser to ensure you are on the right track. Yet there will be other crucial components of your plan to consider too. Your state pension, for instance, will require at least 35 years of qualifying National Insurance Contributions (NICs) in 2020-21 to attain the full new state pension – which is likely to form a key component of your retirement income. You can obtain a forecast of your state pension here: https://www.gov.uk/check-state-pension
Invitation
To discuss your retirement plans, get in touch with your financial adviser here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]