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15 Sep 2020

Pension Awareness Day: how much do you need to save each month for retirement?

How much you will need to put aside depends on the retirement lifestyle you want

Some 27% of over-50s will only start to plan their retirement finances with two years or less to go before they finish work, according to a survey by the Money and Pensions Service.

The research was released to coincide with Pension Awareness Day on 15 September, which aims to promote the importance of pension saving and alert people that they may not be putting away enough for retirement.

Delaying or skipping retirement planning could have detrimental consequences on the quality of your life in retirement. You'll need to be in a secure financial position to fund your golden years before you give up work, so it's important to know how much you'll need to put aside.

Here, Which? explains how you can contribute to a pension and looks how much you may need to save each month for a 'comfortable' and 'luxurious' retirement.

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How do I contribute to a pension?

If you're a defined contribution (DC) pension saver you'll need to pay money into your retirement pot, although how this works depends on the type of scheme you're in.

  • Workplace pension Under auto-enrolment (AE) a total of 8% contribution must go into your pension each month, of which the employer minimum is 3%.Sometimes your employer will contribute more than the required amount, and you can choose to put more in each month, too. This money will then be invested and should build up before you reach retirement.
  • Personal pension Will pay money into a scheme from a provider, selected by you. Like workplace pensions, personal pensions allow you to invest your money with a view to increasing it. Anyone can save into a personal pension, although they're particularly suited to self-employed workers, or people who aren't in work and don't have access to a workplace pension.
  • Self-invested personal pensions (Sipps) These are DIY pensions which are suited to people who want to control where their money goes and how it grows. With a Sipp, you'll essentially be taking responsibility for building and managing your own investments, so you'll need to have the time and confidence to do this.

With any of these types of schemes, what you get when you retire isn't specified in advance - it all depends on how much you put in through your working life, how much your employer(s) contribute, the charges of the scheme and the performance of the investments.

How much do I need to save each month?

How much you'll need to save each month depends on the type of retirement lifestyle you want.

Once you reach state pension age, currently 65 for both men and women, the government will provide a sizable chunk of your post-retirement money through the state pension, but it's unlikely to be enough on its own.

Below, we explain what you could need for two different retirement lifestyle scenarios.

The figures are slightly lower than what our findings showedlast year, as a survey of 6,300 Which? members in June revealed that overall spending is down 5%.

A 'comfortable' retirement

According to Which? analysis, to have a comfortable retirement you'll need almost £169,175 in your pension pot if you're a couple.

This should cover paying for essentials, plus room for a few extras such as European holidays and transport. You may not be able to afford things such as long-haul holidays, regular expensive meals out and buying a new car every five years or so.

If you start saving from a younger age, you'll be required to save much less each month.

Couples who start saving at the age of 20 with no pension savings would need to contribute £213 per month collectively for a comfortable retirement, whereas if both parties started saving at age 40 they'd need to save £384 per month.

A 'luxurious' retirement

A luxurious retirement would require £456,500 in a couple's pension pot. This should cover things such as long-haul holidays, and allow more expenditure on things such as buying a new car every five years.

As a couple, if you wait until you're 40 to begin saving for the future you would need to contribute £1,030 per month for a luxurious lifestyle by state pension age. If you both started saving at age 20, you'd need to contribute £570 per month in total.

The bar charts below outline what you could need to pay in total contributions each month.

If you're single, you can't just half the cost of what you'll need based on the figures above - single people will still need to pay bills for a whole household by themselves, for example, and can't split costs for things such as new cars.

Also bear in mind that your monthly income should rise as you get older, and if you're in a company pension scheme your employer will be contributing some towards your target amount.

Someone earning the UK average salary of £28,000 will be saving £186 per month under auto-enrolment. The more you can contribute, or find an employer that matches your contribution or more, the closer you'll get to these targets.

Coronavirus: saving for your future in difficult times

Saving for retirement isn't easy for everyone - sometimes life gets in the way.

The coronavirus crisis is a good example of this. Some people may have lost their job, or been forced to take a reduced salary, which can make saving for retirement more difficult.

If your pay has been affected by the pandemic, or you simply want to cut down on costs during this time, you can opt out of paying into your pension. However, saving for retirement is important, so you should only really be doing this if you need the money right now to pay essential costs.

If you're close to retirement, you may notice that there's been a fall in the value of your pot due to the economic turbulence caused by the pandemic.

Avoid cashing in your investments as far as possible during this period, to give markets a chance to rebound. Instead, if you can, use other income sources such as cash savings.

If you're a while away from retirement, think about what age you'd like to retire at and when you would want to access your pension. We've put together a series of guides to help you plan for retirement.