Pension savers want to retire on £49k a year: Here’s how to do it

Many workers saving for retirement under auto-enrolment are set to miss their pension income goal by well over £12,000 or a chunky 25 per cent, new research reveals.

A survey of 4,000 adults with a pension shows they typically want to retire on nearly £48,900 a year – which includes a full state pension worth around £11,500 at today’s rate.

A 22-year-old beginning their working life on £24,000, getting an average 2.5 per cent annual pay rise over their working life, and making the minimum 8 per cent of salary contribution under auto-enrolment, would end up with a pension pot of £468,000 at age 67.

That’s a chunky sum and highlights the benefit of long-term pension saving, but Royal London calculates that could be turned into an income of £36,600 a year by buying an annuity and including the state pension.

In order to retire on that desire sum of £48,900, retirees will need to have built a pension pot worth £696,000, plus qualify for the full state pension. 

Royal London says many people will miss their target because they don’t make the most of ways they can boost their fund, such as increasing contributions which their employer would match with free extra cash.

Clare Moffat, pension and tax expert at the firm, says: ‘Many people have an idea of how much they would like in retirement but that doesn’t always match the amount that they have managed to save. This means that they might not be able to retire in the style they wish.

‘It’s important to understand how much you need in retirement and the PLSA’s Retirement Living Standards can help with this.

‘Discovering any potential shortfall sooner can give you time to take action to improve your lifestyle in retirement.’

According to the Pension and Lifetime Savings Association, £31,300 per year is needed for a ‘moderate’ standard of living, while £43,100 is needed for a ‘comfortable’ life. 

The PLSA says the ‘minimum’ standard requires £14,400 per year, ahead of the current state pension.

The PLSA estimates don’t take into account income tax, housing costs or care fees. 

For women, the shortfall in likely pension income is even larger compared to the desired annual sum, according to Royal London.

When including fewer years of working to account for childcare, women could find that their pension pots fall short by £17,000 per year, giving them £32,000 per year compared to the £36,600 average.

Moffat said: ‘There are many reasons for the gender pension gap, including lower salaries among women, higher levels of unpaid caring responsibilities and the effect of the menopause.

‘Taking advantage of financial incentives such as employer contributions and salary sacrifice can help. Even small increases in your monthly contributions can have a dramatic increase in the pot you retire with.’

Who pays what: Auto enrolment breakdown of minimum pension contributions. Qualifying earnings are those between £6,240 and £50,270 of salary.

How can you boost your pension?

One of the prevailing reasons that pension saving is currently falling short is a failure of savers to capitalise on the benefits available to them, says Royal London.

Currently, employers are required to contribute 3 per cent of an employee’s earnings to their pension, with 5 per cent coming from the employee (including 1 per cent tax relief from the Government), making up a combined 8 per cent of qualifying earnings (see above).

Many employers, however, are willing to make higher contributions if the employee boosts their own contributions.

For example, an employer may agree to pay up to a 6 per cent contribution if the employee increases their own contribution to that much of their salary. For the worker, this means they only have to make a small increase on what they pay into their pot, but their employer will significantly increase their share.

Despite this, a tenth of people offered such incentives said they didn’t make use of them, according to Royal London’s research 

Almost half of these said they couldn’t afford to do so, while a quarter said they didn’t understand the incentive.

Some employees choose to opt out of auto enrolment into a pension altogether, with the percentage of those doing so generally hovering in the high single figures.

Making use of auto enrolment will mean you receive pension tax relief from the Government, as well as free cash from your employer contributed into your pot.

If you can afford to do so, you can also benefit from more Government tax relief even if your employer will not match your higher contributions.

The Government offers tax relief equivalent to the total of your annual salary, up to a maximum of £60,000 a year, although the annual allowance rules are stricter for top earners.

Of course, any money paid into your private pension will be locked away until you are 55 (rising to 57 from April 2028).

Some employers also offer salary sacrifice schemes that you may not be automatically enrolled onto, but must actively sign up with to benefit.

These schemes mean you technically take a cut in your pay, but this in turn reduces your National Insurance payments.

The money saved is diverted into your pension, or to other benefits like childcare, while your employer will also pay less National Insurance as a result.

SAVE MONEY, MAKE MONEY

£100 Isa cashback

£100 Isa cashback

Open a new stocks & shares Isa with £10k

Fix energy bills

Fix energy bills

Find out if you can save with our partner uSwitch

5.16% cash Isa

5.16% cash Isa

Get 5.16% with our code TIM

5.01% cash Isa

5.01% cash Isa

Cash Isa and money management

Sipp cashback

Sipp cashback

Up to £3,000 when you open a Sipp by 28 Feb

Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence. Terms and conditions apply on all offers.