What’s the best way to save for retirement?

1. Work out how much you need in retirement

The first thing to determine is your likely level of retirement spending: how much money will you need to retire in the way you want? Here it helps to divide between essentials and luxuries, to give yourself a spending ‘band’ that ranges from ‘minimum required’ to ‘ideal situation’. 

Most people believe that after retirement their annual spending will be significantly lower than during their working life. It’s true that a number of costs are usually eliminated such as mortgage payments, providing for children, and expenses associated with going to work. However, more free time often means more opportunities to spend money. 

In the early years of retirement, when health is generally better, you’re likely to want to travel or tick things off your bucket list. Don’t forget there is also the possibility of unexpected medical expenses or other unplanned spending, so it’s best to build in a margin to allow for contingencies. You could think of retirement as several phases rather than as an unchanging period of time to better estimate how much you’re likely need. 

Spending often starts off reasonably high in the more active early retirement years before falling away. It can then pick up again as medical and care needs increase. 

For a rule of thumb guide, the University of Loughborough’s research into retirement living standards could help. It has estimated that in 2025 retirement costs are as follows:

• A very basic retirement will cost £13.400 for a person living on their own or £21,600 for a couple
• A moderate retirement will cost £31,700 for a single person or £43,900 for a couple
• A comfortable retirement will cost a single person £43,900 and a couple £60,600

Of course, some of this will be provided by the State Pension when you reach State Pension Age. This is currently 67 but is expected to rise to 68 between 2044 and 2046. The full New State Pension provides £11,973 in the tax year 2025/26 rising to £12,547 for the tax year 2026/27. 

The gap between the New State Pension and your lifestyle will have to be made up from your pension savings. Don’t forget other sources of income such as company pensions, or other assets such as property. 

2. Get an idea of how long your retirement money needs to last

Alongside realistic expectations about post-retirement spending, knowing how long retirement will last will help you define the required size of a pension pot if you don’t want to outlast your savings. Longevity is, of course, a huge unknown. You can get a feel for it by using the Office of National Statistics life expectancy calculator. As well as telling you the average lifespan you could expect, it will show you the likelihood of reaching milestone ages such as 100.  

3. Calculate how much you need to save for retirement

The answer to the question “how much will I need to save for retirement?” is the spending gap multiplied by your expected retirement time in years.  

At this point, our pension drawdown calculator can help you. It takes into account your current age, the existing resources you have built up, and the remaining time you have to add to your pension savings.

4. Start early to avoid disappointment

Once you have been through this exercise, you’ll get a better idea of what you need to do to achieve your retirement goals. Either retire later or save more.  

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 – the potential to earn growth on top of growth. You might not think that saving a few hundred pounds extra here and there in your 20s or 30s will mean much in the long run, but the power of compounding can ‘snowball’ that money if invested well. 

5. How to save for retirement 

Investing is one of the best ways to save for retirement. The longer you have until retirement, 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 think about having most of your assets in riskier investments such as shares. Larger ups and downs in the value of your pot are inevitable, but over the longer 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 opportunity to buy more shares in good companies at a lower cost.

6. Take advantage of pension tax relief 

To encourage people to save for their futures, the government offers considerable advantages to contributions to pension schemes by way of tax relief: 

• 20% for a basic rate taxpayer
• Up to 40% for a higher rate taxpayer
• Up to 45% for an additional rate taxpayer

For someone in the higher rate income tax band it means a £1,000 contribution costs just £600. You can think of that as a 66.7% return on your money before you’ve even invested it. But you can only save up to the lower of £60,000 or 100% of your salary in any single tax year. But benefits depend on individual circumstances and tax rules can change.  

It’s been estimated that nearly 50% of people aren’t aware of tax relief, so lots of people are potentially missing out. 

In addition to your workplace scheme, using a tax-efficient savings account like a self-invested personal pension (SIPP) when saving to retire will also help you get to your retirement goals faster. All returns within the SIPP are generated without paying any tax. 

You will also need to consider your tax position when you take income from your pension savings. You can currently do this from the age of 55, though this age is set to move to 57 from April 2028.  

While you may get tax relief on your contributions to your pension, the flipside is there is potentially tax to pay when you withdraw, albeit you can take up to 25% of a personal pension, such as a SIPP, as tax-free cash under current rules. The other good news is you can time when and how much money you take to suit your circumstances, so with a bit of planning you can minimise the tax on savings and building society accounts and other income. 

7. Flex your retirement goals

Retirement goals evolve through the years. You may find you need to tweak things along the way to take account of how things are panning out. Maybe you have more disposable income to fund pension contributions than you thought. Maybe you have less. Perhaps your investments are doing better or worse than expected. 

In any retirement plan, many assumptions must be made and it is unlikely things will go exactly plan you built. Yet having a goal in mind, and a roadmap to meet it will help keep you focused on it and put you in a better place to take action when necessary. 

8. Take financial guidance and/or advice when you need it

Savings and retirement planning can be complex, but you don’t have to tackle this on your own. Getting professional advice can help you prioritise your needs and can be very useful as you approach retirement. There are free resources such as the government’s Moneyhelper website or consider our coaching service to help you take the first steps if you are unsure of the best way to save for retirement. We offer a free, no commitment, 15-minute call with a qualified professional to discuss your needs.