The onus for providing retirement income is increasingly falling on individuals. Few will have the luxury of an employer-provided defined benefit pension promising a certain level of income, especially outside the public sector. Meanwhile, the State Pension Age is rising, set to reach 68 by 2046 and could go higher still.
What is a comfortable retirement income for a single person in the UK?
The State Pension alone is probably not enough. It currently provides just over £12,000 a year for the New State Pension, which is unlikely to maintain most people’s minimum standard of living in retirement.
The University of Loughborough’s research finds that a ‘moderate’ retirement costs £31,700 a year for a single person and a ‘comfortable’ retirement costs £43,900. This assumes that the individual owns their own home and has paid off their mortgage.
What is a comfortable retirement income for a couple in the UK?
Meanwhile, the same research finds that a ‘moderate’ retirement costs £43,900 each year for a couple and a ‘comfortable’ retirement £60,600. Often the cost of living is not double that of a single person for a two-person household as bills and various other expenses of running a household are shared.
However, it’s still expensive, and it means saving for retirement is essential if you want to fully enjoy your later years. Fortunately, a few small steps can help you create a plan and put it into action. Here’s some tips to help you get going on the road to financial security in later life.
Nine tips for a comfortable retirement
1. Maximise pension tax relief
To encourage people to save for their futures, the government offers the significant incentive of pension tax relief. For example, an investor contributes £8,000 into their personal pension such as SIPP and £2,000 is claimed back from HMRC by the pension provider meaning £10,000 is invested overall.
A higher rate taxpayer could claim back up to a further 20% via their tax return, reducing the overall cost of the contribution to as little as £6,000. To put it another way, that’s a 66.7% return on your money before you have even invested it! In the same instance, additional rate taxpayers could claim back up to a further 25% making the cost just £5,500 for a £10,000 contribution.
The flipside is that income or withdrawals from pensions are taxable, beyond the first 25% of the pot usually, Nonetheless, tax relief means pensions have special ‘superpowers’ that other investment accounts can’t match for efficient retirement planning – though benefits depend on individual circumstances and tax rules can change.
2. Maximise pension contributions from your employer
If you are employed, you will be entitled to pension contributions made by your employer, provided you keep opted into your workplace pension scheme and make the required level of contributions yourself.
The minimum ‘auto enrolment’ contribution to an employee’s pension savings is 8% of qualifying earnings. Employers must pay at least 3% and the employee the remaining 5%. You should generally prioritise this form of investing as it is usually the most efficient way to provide for retirement.
3. Start early and keep going
For many people retirement seems a long way off and saving into a pension isn’t always seen as a top priority. After day-to-day living expenses, and other needs such as housing costs and utility bills, it can be hard to put money aside. Yet the earlier you start the more chance you have of achieving the retirement you desire and the easier it will be. If you have less time to invest the amount you need to save is likely to be higher.
The younger you are the more chance you have of building the savings needed to fund your leisure years. Even saving small amounts at the start of your journey can build into a reasonable pot with the power of compound returns. You might not think saving a few hundred pounds extra here and there in your 20s or 30s will mean much in the long run, but compounding – getting returns on your returns over time – can ‘snowball’ that money over time if invested well.
4. Get investment risk right
Investing is often best way to provide for a comfortable retirement, and the longer you have the higher the level of risk your pension investments can generally withstand. If you’re young and have 30 or more years to go, you should generally have most of your assets in riskier investments such as shares. Larger ups and downs in the value of your pension pot are inevitable, but over the long term you should be able to secure higher returns that more reliably outpace rises in the cost of living.
What’s more, if you are adding to your retirement portfolio consistently over your working life, temporary market falls along the way can actually work to your advantage. You’ll have the ability to buy more shares or other assets at a lower cost. Being too cautious can therefore be a wasted opportunity. Yet many people who are not engaged with their pensions end up in funds that don’t maximise their potential returns, selecting by default a fund that contains some lower risk assets when they are just starting out.
Take a look at your pensions statement to help work out if you are invested in the right funds for your age and level of risk you are happy with. Similarly, if you are closing in on the time you want to draw money out from your pension you will probably want to control fluctuations in the value by allocating more money to more stable assets.
5. Don’t underestimate the cost of living
Inflation – or rises in the cost of living – is big news at the moment with authorities struggling to get it back under control. Most central banks target an inflation rate of around 2%, but even at this modest level prices will double every 35 years. If you’re 35 now, goods and services are likely to be at least twice the price they are today by the time you get to retirement. And even once you retire, inflation will still affect the lifestyle you can afford.
Everyone’s circumstances, needs and desires in retirement are different, as well as life expectancy, but with lots of additional free time on your hands you may need more money than you think. Remember too that income is needed for your whole lifetime, and a lot can change. This is why investing early gives you as much time as possible, and the best chance, to provide the income needed to retire comfortably and reach your goals.
Read more: Financial priorities during a cost-of-living squeeze
6. Use a pension calculator
A pension contribution calculator can help you understand how much money you’re likely to have for your retirement. It takes into account your existing funds and you can experiment with different retirement dates. You can also see the effect of adding a one-off contribution to your pot by increasing the size.
You might find the figures are scary, but don’t forget to factor in how employer contributions and the leg up offered by pensions tax relief can lower the cost. Forewarned is forearmed.
Use our pension contribution calculator
7. Don’t forget about ISAs
Pensions can be highly tax efficient but Individual Savings Accounts or ISAs can be the real unsung heroes of retirement. That’s especially the case for those who may need access to their money before retirement age, or those who want to retire early or consider a ‘mini retirement’.
An ISA, which currently has an annual limit of £20,000 and the facility of tax-free withdrawals at any time, offers significant flexibility. As with pensions, a Stocks & Shares ISA offers lots of investment options to help you strike the right balance of investment risk, and any investment growth and income is tax free.
It is also worth noting the Lifetime ISA currently offers a modest ‘hybrid’ option. There is a 25% ‘bonus’ on contributions, broadly equivalent to basic rate pension tax relief, and there’s no tax when money is taken out to buy a first home or for retirement after age 60. However, the maximum you can contribute each year is much lower at £4,000, which also counts towards the overall £20,000 annual ISA limit.
However, following announcements made at last Autumn’s budget, it appears that Lifetime ISAs could be scrapped in favour of a simpler product designed solely for house purchases.
8. Understand the State Pension
The State Pension is an important foundation to people’s retirement income. Yet confusion abounds about how much is paid, from what age, and the rules for qualifying.
Our research revealed that one in seven do not know whether they will qualify for the State Pension and that, on average, people think you need 24 years of NI contributions or credits to qualify for the full New State Pension. 11% said they thought there was no minimum to qualify.
In fact, you usually need 35 qualifying years to get it in full. Crucially, you won’t receive any State Pension at all if you have less than 10 years of NI contributions. You can obtain a State Pension forecast from the Gov.uk website. As well as checking your State Pension age, the forecast can tell you how much you could get and how it might be possible to increase it through extra National Insurance contributions.
9. Take financial advice when you need to
Retirement planning can be complex, especially when it comes to how much you need to retire comfortably, but you don’t have to tackle it on your own. Getting advice or guidance can help you prioritise your needs and can be very useful and cost-effective, especially as you approach retirement.
There are free resources such as the government’s Moneyhelper website. Or, if you would like a focused conversation with a financial professional, Charles Stanley Direct Financial Coaching offers a consultation with a financial planner to help steer you towards your goals. This could help you to take control of retirement plans, giving you financial freedom and peace of mind.
This article includes data and research from the Retirement Living Standards, developed through independent research by Loughborough University, as well as findings from Charles Stanley's Money Milestones research from Censuswide in March 2023
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
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