When it comes to building a secure and comfortable retirement, knowing how much you need to save is crucial.
Whether you’re just starting out or are already well into your savings journey, having a clear goal can help you plan ahead and make informed decisions.
Below, we crunch the data to provide you with a better understanding of the financial requirements for different retirement lifestyles and offer practical tips to help boost your pension savings.
How much does retirement cost?
To set a realistic savings goal, you need a clear idea of what your retirement might cost.
The Pensions and Lifetime Savings Association (PLSA) has defined three ‘retirement living standards’ – minimum, moderate and comfortable – and calculated how much retirees would need to spend to achieve those standards. Each standard represents a different level of financial security and lifestyle.
- Minimum: this covers all your basic needs with a little extra for social activities.
- Moderate: provides more financial flexibility, including an annual foreign holiday.
- Comfortable: allows for a more spontaneous lifestyle, with several UK minibreaks and a foreign holiday each year.
The table below shows our calculations of how much a 66 year-old retiring today would need to have built up in pension savings in order to fund each retirement living standard until age 100. Not many people will live to 100, so this may not be appropriate for everyone, but underestimating your life expectancy could mean your pension runs out too quickly.
Our calculations assume each individual qualifies for the full state pension, which is currently £11,970 a year. Remember, income from pensions is taxed at your normal rate of income tax. The figures below show the amount you’d need to fund each retirement living standard after basic rate income tax of 20% has been deducted.
Pension pot needed to reach different standards of living in retirement
| Single retiree | Couple | |||
| Retirement living standard | Cost per year, after tax | Required pension savings (in addition to state pension) | Cost per year, after tax | Required pension savings (in addition to state pension) |
| Minimum | £14,400 | £42,133 | £22,400 | N/A* |
| Moderate | £31,300 | £478,295 | £43,100 | £453,322 |
| Comfortable | £43,100 | £793,376 | £59,000 | £863,680 |
* Minimum standard of living is covered by two lots of state pension (£11,970 x 2 = £23,940).
Notes: Assumes the state pension rises by 2.5% a year; the required spend increases by 2% a year to account for inflation; average annual investment growth is 5% after costs; and the full state pension is the investor’s only other source of taxable income. The investor withdraws their 25% tax-free cash (capped at £268,275) gradually over time rather than upfront.
Source: PLSA, Vanguard.
Bear in mind that the PLSA’s figures are based on averages and won’t necessarily reflect your own circumstances. You could find your spending starts off high as you enjoy your newfound freedom, declines as you get older and then ramps up again if you need to pay for long-term care. Nevertheless, having a benchmark can help you set a clear savings goal.
How to boost your retirement savings
If you’re concerned about a shortfall in your pension pot, there are several steps you could consider to help boost your savings:
Top up your pension
Topping up your pension – whether that’s by increasing your monthly contributions or adding a lump sum – could make a big difference to the size of your pot at retirement. Not least because of the tax relief you get on personal pension contributions. For every £80 you contribute to your pension, you’ll get a top-up of £20. If you’re a higher-rate or additional-rate taxpayer, you can claim back an additional £20 or £25, respectively, via your self-assessment tax return. Tax relief can really help to supercharge your long-term savings.
Start as early as you can
The earlier you start saving, the better.
We calculated how much someone would need to save if they wanted £500,000 of pension savings by age 66. That would be more than enough to fund a moderate retirement using the assumptions above. We assumed the investor had a workplace pension1 as well as a low-cost self-invested personal pension (SIPP) and that their salary increased by 3% a year. We also assumed an investment return of 5% after costs.
We found that a 25-year-old earning £30,000 a year would need to invest £90 a month in their SIPP to achieve a pot of this size. But for a 50-year-old earning £60,000 a year, they’d need to invest £434 a month into their SIPP, even if they already had £100,000 of retirement savings. These amounts are in addition to the 5% of their salary that they are contributing to a workplace pension.
Cut the cost of investing
Pension fees vary from one provider to another and can have a significant impact on how long your savings last in retirement.
One way to potentially reduce investment charges is to consolidate your pensions. That means bringing together all your different pension plans into one pot, such as a Vanguard Personal Pension. By consolidating your pensions, you’ll have just one fee to pay for all your pension savings. It can also cut down on admin and make it easier to know whether you’re on track to achieve your savings goal.
However, it may not always be in your interests to transfer out of a pension, particularly if you have a defined benefit (DB) pension or any other guarantees2. If in doubt, it’s always worth seeking financial advice.
Overall, this could be a good opportunity to review your pensions, check how much you’re paying in charges and, if you’re able to, consider increasing your contributions to boost your chances of achieving the retirement you want.
1 We assumed minimum auto-enrolment of 8% of salary between £6,420 and £50,270.
2 These pay a guaranteed income depending on your final or average salary and are funded by employers. In general, DB pensions are usually not suitable for consolidation.
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