What is a good pension pot?
It is one of those questions to which there is no straightforward answer because it depends on the standard of living you aspire to in retirement.
A survey last year by consumer group Which? of its pensioner members found that households spent a shade under £2,110 a month, or around £25,000 a year, on average.
This covered all the basic areas of expenditure (which had a combined cost of £17,200 per year) and some luxuries, such as European holidays, hobbies and eating out.
You would require £40,000 a year if you include the likes of long-haul trips and a new car every five years.
Which? found that travelling and holidays were a very important part of retirement, with people spending £4,540 a year on this part of their life.
However, priorities change slightly as you move through your retirement years, with less spent on food and drink, housing payments and recreation but more on utility bills, health, and insurance premiums.
It states: “If you were looking to get a comfortable post-tax income of £25,000 a year and wanted to get a guaranteed income paid to you via a joint-life annuity, you’d need a pot of £262,500. This also factors in receiving annual state pension of around £14,000 as a couple, so you’d need to generate annuity income of around £11,000 per year.
“To get the same amount from income drawdown, which sees you keeping your money invested in your pension and withdrawing a regular income, you’d need £169,175. This assumes your savings grow by three per cent annually.
“Producing post-tax annual income of £40,000, including the state pension, would mean an initial pot of around £718,300 to buy a joint-life annuity or £456,500 invested in income drawdown.”
The key is starting young.
Which? continued: “If you wait until you are 40 to begin saving for the future, you’ll need to contribute £384 per month to achieve a comfortable retirement by the time you reach state pension age. The figure rises to £1,030 per month if you are aiming for a luxurious lifestyle. The projections contain some quite scary numbers, although saving a few hundred pounds per month from your mid-20s is obviously more palatable than having to find much more if you leave your retirement saving until later in life.”
Estimates vary but are broadly in line.
According to the Department for Work & Pensions, the average pensioner currently has a retirement income of £17,200 a year (not including the state pension). This would require a pension pot worth £280,000 by the time you reach 65.
Assuming no mortgage, rent or social care costs, the Pensions and Lifetime Savings Association suggests a single person needs roughly £10,000 a year to achieve a frugal retirement, £20,000 for a moderate one, and £30,000 to be comfortable. For couples, the respective figures are £15,000, £30,000 and £45,000.
The website MyWalletHero notes: “A £100,000 pension pot would give you an income of between £4,000 and £5,000 a year. You would also receive a lump sum of £25,000 tax-free cash. If you combine this with what you receive from the state pension, then you are somewhere between a frugal and comfortable retirement level.”
The obvious way to improve your pension is to inject more cash. But we all have financial commitments to meet and that may not be possible.
However, there are things you can do – check how much your pension provider is charging you in fees; see where your money is invested and whether change is needed; and get professional advice.
Old age creeps up on the unwary.