If you’re looking for an income of around £26,500 per year in your retirement years – the current average salary for UK workers – you’ll need to save a fairly substantial pension pot – £442,000 in fact, according to our pension pot calculator. Are you on track for the standard of living you’d be comfortable with in later life, or is it time to start saving in earnest?
Securing a good nest egg
The size of people’s pension pots varies hugely. While the directors of the UK’s top firms are sitting on average savings of £4.3m, research has suggested that one in seven people retiring this year will do so with no personal pension whatsoever.
Currently, the average British worker retires with a pension pot worth around £40,000. But how much money is it necessary to have to live comfortably in retirement? Surveys have suggested that most people significantly misjudge how long they’ll live for, and how much cash they’ll need to get them through retirement.
How Nutmeg works
Let’s take the average pension pot of £40,000. The government allows people to take a tax-free lump sum of 25% of their pension savings, which in this case would leave £30,000 to buy an annuity. A non-smoking male looking for a guaranteed annual income from the age of 67, can expect to receive a yearly payout of about £1,800. Include a full state pension and his total annual income increases to about £8,000. This isn’t nearly enough to afford the kind of lifestyle that most people would like to enjoy once they’ve finished work.
Research conducted earlier this year found that to own a car, fit in two domestic holidays and one foreign getaway a year, and pay for hobbies and pastimes, a pensioner in the UK would need an income of almost £15,000 a year, or more than £1,200 a month.
Closing the gap
Assuming investment growth of 5%, a 30-year-old man would need to pay £413 a month into a pension fund to be able to expect an annual retirement income in the region of £15,000 from the age of 67 onwards.
Albert Einstein is said to have referred to compound interest as the eighth wonder of the world – and it is the reason to start putting money aside for your future as soon as possible. The earlier you start saving the more you’ll accumulate, as you’re earning interest on your interest.
New rules governing pensions came into force in April 2015 that put more power in the hands of individuals in terms of how they access their retirement funds. You no longer need to buy an annuity. So the old rule – ‘4% of your pension pot annually will keep you going for 30 years’ – is no longer the only steer.
A cultural shift is already occurring as people are working for longer, but the government hopes its new legislation will bring about a new savings culture in the UK. This should lead to individuals taking steps to ensure they’re saving enough money, early enough, for their retirement. Planning for the future and wise investment management have never been more important.
Try out free pension calculator to find out how much you might need to save each month to fund your retirement lifestyle.
The Nutmeg personal pension
With the Nutmeg personal pension, we will build and manage an investment portfolio that is tailored to your financial profile and the level of risk you’d like to take. We monitor your investments constantly and make regular changes, completely free of charge, to help keep your portfolio in line with your goals, profile and appetite for risk. You can log in whenever you want to see where you pension pot is invested and how it’s performing. You pay just one single low fee of between 0.3% and 0.95% (including VAT) per year, depending on the size of the contributions you’ve made to all of your Nutmeg investment pots.
‘UK Labour Market, September 2014’ Office for National Statistics: http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/september-2014/statistical-bulletin.html#tab–i–Summary-of-latest-Labour-Market-Statistics
‘At last… good news on final salary pensions: Reprieve for index-linked payouts’ Daily Mail: http://www.dailymail.co.uk/news/article-2670006/At-good-news-final-salary-pensions-Reprieve-index-linked-payouts.html
‘Top company bosses sat on average pension pot of £4.3m – while employees have just £40,000’ ThisisMoney: http://www.thisismoney.co.uk/money/pensions/article-2199044/Top-company-bosses-sat-average-pension-pot-4-3m.html
‘One in seven will retire with no pension, research shows’ Prudential: http://www.pru.co.uk/pdf/presscentre/no_pension.pdf
‘Confused about your pension? What to do with a £40k pot’ The Guardian: http://www.theguardian.com/money/2014/may/10/confused-pension-what-do-annuity
‘UK: Many misjudge how much money they need for retirement’ Aviva: http://www.aviva.com/media/news/item/uk-many-misjudge-how-much-money-they-need-for-retirement-17319/
‘The Money Advice Service’: https://www.moneyadviceservice.org.uk/en/tools/estimate-what-you-need-to-save-for-retirement
‘Britain’s pensions unaffordable say economists’ Channel 4: http://www.channel4.com/news/britains-pensions-unaffordable-say-economists
With investment, your capital is at risk.Pension rules apply.