How much do I need to save for retirement?

Important information - the value of investments can go down as well as up, so you may not get back what you invest. Eligibility to invest in a SIPP and tax treatment depends on personal circumstances and all tax rules may change in the future. You cannot normally access money in a pension until age 55 (57 from 2028). It’s important to understand that pension transfers are a complex area and may not be suitable for everyone.

It’s a tough question to answer. None of us really know how long we’ll live or what spending demands will be placed upon us during retirement. Then there’s the performance of financial markets which will also influence how our investments will grow over the years leading up to retirement.

With that in mind, a target level of saving that would give you a decent standard of living in retirement would be a great thing to have. It wouldn’t make hitting your target any easier, but it would allow you to know in good time how you’re progressing and to make changes along the way to improve your chances.

The reality is that you are likely to have less income to live on in retirement than in your working life. But the good news is that your living costs are likely to be lower as well.

With some luck you will have cleared any debts by the time you stop working, including having no mortgage to pay. Children will be grown up and should now need less financial support and there’s some help in the tax system – you pay no NI after State Pension age and of course there’s the State Pension itself providing a boost to your income. And remember – when you are working a proportion of your salary may be taken up by savings contributions, whether into a pension or elsewhere. These can be reduced or stopped in retirement.

It’s sometimes said that you’ll need a retirement income that is two-thirds of your pre-retirement income to maintain your standard of living. Research from the Pensions and Lifetime Savings Association¹ found that a single person will need roughly £31,300 a year to achieve a moderate living standard in retirement, and £43,100 for a comfortable one. This is a good goal to have in mind but may be tough for many to reach.

Fidelity's Retirement Calculator can help you take a look at the kind of lifestyle you’d like in retirement and get an estimate of how much income you may need each year.

Most people will be able to rely on the State Pension to provide some of their retirement income. The current full State Pension income is £221.20 a week and this is hugely valuable because the income is guaranteed and will rise broadly in line with the cost of living. That means it be there to cover the most essential costs like housing, bills and food.

You can check to see if you are on course for a full State Pension by using the Government's forecasting tool. You also need to know when your State Pension will begin. You can find that out here.

Along with the State Pension, some people will be able to rely on other guaranteed income in retirement, for example from Defined Benefit pensions or buy-to-let property. Just like the State Pension, this is valuable because you can rely on it to cover your essential needs and not have to use your wider pension savings to provide that income.

Any other income you need will have to be provided by your own pension savings. If you wanted to match the PLSA’s standard for a moderate retirement income of £31,300¹ a year – and assuming you are entitled to the full state pension of £221.20 a week but had no other retirement income – you would need to generate around £19,800² a year from your pension pot.

There are different ways to turn your pension savings into an income. You could consider using pension drawdown, lump sums, an annuity or a combination of any of these. There is a full explanation of the ways to access your pensions savings here.

Pension drawdown allows you to take the income you want, whenever you need it – giving you total flexibility over your retirement savings. As your money remains invested, it has the potential to continue to grow and provide for your future (although of course this is never guaranteed). It will keep benefitting from tax efficiencies too and can be passed onto your loved ones when you die without inheritance tax applying. 

A long-standing rule of thumb is that annual withdrawals of 4% from a pension pot should be sustainable in the long term. Based on that, an invested pension pot worth £495,000³ would be required to generate an income of £19,800, which taken along with a full state pension would provide a moderate retirement income according to the PLSA standards.

Fidelity’s Retirement Service can provide guidance at no extra cost to help with your decisions, or paid-for advice with personalised recommendations based on your circumstances. 

We also recommend the Government’s Pension Wise service which offers free impartial guidance to help you understand your options at retirement. You can access the guidance online at moneyhelper.org.uk/pensionwise or call them on 0800 011 3797.

Source:

¹ Pensions and Lifetime Savings Association – UK Retirement Living Standards in 2023.
² Calculation 221.20 x 52 = 11,502.40.  31,300 – 11,502.40 = 19,797.60
³ Calculation 495000 / 100 = 4950  4950 x 4 = 19800

Important information - It’s important to understand that pension transfers are a complex area and may not be suitable for everyone. Before going ahead with a pension transfer, we strongly recommend that you undertake a full comparison of the benefits, charges and features offered. To find out what else you should consider before transferring, please read our transfer factsheet. If you are in any doubt whether or not a pension transfer is suitable for your circumstances we strongly recommend that you seek advice from one of Fidelity’s advisers or an authorised financial adviser of your choice.