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How will you afford retirement?

Retirement could last half as long as your working life, or even longer. With the State Pension age set to rise in the coming years, here are some of the best ways to make sure you can afford retirement and fund your future pension pot.

| 10 min read

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 creeping up and is set to reach 68 by 2046.

In a recent survey, 58% of the under-55s said they will not rely on the State Pension to fund their retirement or do not expect it to provide much of their retirement income. But less than half of them understand the need to make alternative plans.

At the same time, better medical care and new drugs may extend life expectancy in the future. Your retirement may last half as long as your whole career, or longer, so it is important to think about your goals for this portion of your life and how you’ll fund them. But where do you start, and how do start defining goals so you can work towards them?

How to fund your retirement

Person counting retirement money

1. Work out how much you need to retire

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 this as several phases to better estimate how much you’ll need for an affordable retirement.

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.

If you’re wondering if you can afford to retire now, the University of Loughborough’s research helps. It has estimated that in 2023 retirement costs are as follows:

  • A very basic retirement fund will cost £12,800 for a person living on their own or £19,900 for a couple
  • A moderate retirement will cost £23,300 for a single person or £34,000 for a couple
  • A comfortable retirement will cost a single person £37,300 and a couple £54,500

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 retirement 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 to be expected, it also shows the likelihood of reaching various ages.

Knowing how much you need each year, on average, and how long you might need that for, will help you calculate the size of the retirement pot you require, after allowing for other sources of income such as the State Pension, defined benefit pensions, or other assets such as property.

At this point, our pension drawdown calculator can help you. Your current age, the existing resources you have built up and the remaining time you have to add to your retirement provision are the key variables it takes into account.

Calculate if you will have enough for the retirement you want

3. Start early to avoid disappointment

Once you have been through this exercise, you’ll get a better of 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 – getting returns on your returns over time – can ‘snowball’ that money over time if invested well.

Investing is one of the best ways of saving 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 generally have the majority 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 inflation – 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 out to your advantage. You’ll have the opportunity to buy more shares in great companies at a lower cost.

4. Take advantage of pension tax relief

To encourage people to save for their futures, the government offers considerable advantages by way of pension 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 a higher rate taxpayer it means a £1,000 contribution costs just £600. To put it another way, that’s a 66.7% return on your money before you have even invested it. When it comes to retirement planning, the pension has special ‘superpowers’ that other investment accounts can’t match – though 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.

You will also need to consider your tax position when you take income from your pension, which can be accessed from age 55 currently, 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 cash tax-free 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 burden.

5. 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 or less disposable income to fund pension contributions than you thought. Perhaps your investments are doing better or worse than anticipated.

In any retirement plan, a lot of assumptions have to be made and it is unlikely things will go exactly how they are modelled in advance. Yet having a goal in mind, and a roadmap to meet it will help keep you focused on it and better allow you to take corrective action where necessary.

6. Take financial advice when you need to

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, and our OneStep Retirement Savings Plan can help you create a tailored financial plan with our expertise.

What is a OneStep Financial Plan?

OneStep is our financial planning solution for people with a tricky challenge they need help to solve. Whether it’s to do with your retirement, passing on wealth or your financial health, our experts will provide guidance and streamlined advice

Each One Step Financial Plan provides guidance and streamlined advice around a commonly asked financial question for people with non-complex needs. Retirement Savings Plan can help you:

  • Figure out when you want to stop working and how much money you’ll need to support the lifestyle you want
  • Create a savings and investment plan that makes the most of your tax-free allowances
  • Take control of different pensions as well as any other savings and investments you may already have
  • Make sure any existing plan is on track, and help you think about the best ways to close any funding gap should one arise

Want to find out more? Discover our top tips to help you prepare for retirement.

*Please note: Research carried out by Charles Stanley in partnership with Censuswide, 8-14 March 2023. Sampling 2,000 mass affluent investors defines as those with above-average salaries and with at least £1,000 in accessible cash/savings or those who have retired and who have more than £1000 in savings.

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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