What is a good monthly pension amount in the UK?

Planning for retirement can be daunting, especially when you have to make decisions now for a future that could be decades away. By the time you reach retirement age, you will likely stop working, meaning your income will drop significantly. Your lifestyle, health, and circumstances could also change dramatically, with financial implications for each.

By that point, the pension decisions you’ve made and the amount of money you’ve saved could mean the difference between a life of limited means and the lifestyle you’ve worked hard for. Experts say a “comfortable retirement” now costs around £43,000 a year, and with retirees now facing six-figure shortfalls between the state pension and even the most basic retirement, most of us will rely on a private pension to make up the difference.

But what is a good private pension pot? How much should you be saving each month to ensure a comfortable retirement? This article will explore these questions and provide you with the information you need to make informed decisions about your future.

How much pension do you need?

The simple answer is: it depends. Generally, the more you put away, the more you will have when you retire. But if you die earlier than expected, you’ll miss out on money you could have enjoyed during your working life. If you save more than you can afford, that money is locked away, and you could start to struggle now.

However, putting away too little could hinder your quality of life later on, when you might value comfort the most – and it’ll be too late to change it.

According to the Pensions and Lifetime Savings Association (PLSA), a comfortable retirement includes a generous food and clothing budget, a luxury two-week holiday and three domestic mini-breaks, along with a relatively new car. This now requires an annual income of £43,100 for single people and £59,000 for couples. The amount is lower for a moderate or minimum income, which both come with lifestyle changes.

The PLSA says that 76% of people are on track to meet the Minimum retirement, including all couples on the full state pension. One in five workers should reach the Moderate level, and only 8% will achieve the Comfortable level.

This can be a useful guideline, but the actual amount you will need depends on many factors, like your circumstances, your income, where you live, and what’s achievable, along with the lifestyle you’re seeking.

How to calculate your target pension income

According to Royal London, the average income people think they’ll need in retirement is £15,348. But this won’t be enough for everyone, and it can be difficult to know where to start with your own calculation.

One way to plan for retirement is to choose a target income, then work out how much you’ll need in your pot to provide it. You’ll need to think about the lifestyle you want to lead and when you might want it to start. But before that, you should start by looking at your existing finances.

Lily Megson, of My Pension Expert, said: “At the outset, determining your target income for retirement requires a thorough assessment of your financial situation. Retirement planners must take stock of their existing savings, investments, pension funds, and any other assets earmarked for retirement. It’s also crucial to also track down any overlooked small pension pots that may have been forgotten. These savings and investments then have to be balanced against any debts and outgoings.

“Once your financial situation is clear, the next step is to define your retirement objectives. This involves envisioning the lifestyle you aspire to in retirement, including factors such as housing arrangements, daily expenses, travel and leisure pursuits. Naturally, a more comfortable retirement lifestyle necessitates a higher annual income.”

As a starting point, some experts suggest the 70% rule, where you aim for 70% of your current salary as a retirement income. Another option is to aim to build a pot that is 10 times your annual salary.

However, it may be that neither of these methods is right for you.

Michelle Holgate, of wealth manager RBC Brewin Dolphin, said: “Some people will say that you need a multiplier of your current salary as a retirement income, however, your current requirements will not necessarily match those you have in mind for your retirement. It is best to regularly evaluate your pension savings to see if they are on track to meet the level of income you need or would like in retirement.

“The retirement pot size will depend on your retirement goals. Many people assume they need an income similar to their current income, however, this could be more or less throughout your retirement years for many reasons.”

Once you do get an idea of the kind of retirement income you want, online calculators like the one offered by Aviva can show how much you might need in your pot to provide it.

What is a good pension pot?

Ultimately, a good pension pot is one that is going to provide you with the retirement you want.

To reach the amount for the PLSA’s various levels of retirement, the size of the pot varies substantially depending on which level you’re aiming for.

If you’re just starting your pension, here’s an idea of how much you’ll need to put in:

If you’ve already started, there are lots of different factors to consider, like how old you are and how much you’ve already got.

There is also the state pension to consider, as this will count towards your income – meaning you might not need to save as much. Keep in mind though that the state pension age might increase before you retire – and you might not want to wait that long to stop working.

You’ll get tax relief on the contributions you make, and your employer will pay in too, so as long as the right amount is going in every month, you might not need to contribute it all yourself. Most people have more than one pension pot, so remember to factor those in as well.

However, you should also remember that your provider will invest your fund over the years. This means it can go up or down, and this too affects how much you need to put in.

The key to reaching and maintaining a good pot is to monitor it and keep checking you’re on track for the retirement you want. You can view it at any time, and most providers will offer online access. You’ll also receive an annual statement, which will give you a forecast showing how much you’re on course to get if you retire.

You should look at all this information carefully and judge whether you need to make any changes. Consider financial advice if you think you need it.

How does my pension compare?

By monitoring your fund, you can see how well it’s performing. However, everyone’s circumstances are different, so it’s not necessarily helpful to compare your pension pot to someone else’s.

The most important calculation is whether it’s on track to provide enough for your own retirement. For many people, it might not be.

Steven Cameron, of Aegon, said: “Unfortunately, the amounts people are holding in their pension, particularly if they have no defined benefit entitlements including from past jobs, is often woefully inadequate to provide a comfortable income level in retirement.

“The state pension provides a sound basis but for most won’t be enough. With many people completely unaware of this, we need to find ways to help people make informed decisions which could mean saving more now or accepting they’ll need to work a few years longer before retiring.”

Am I saving enough?

If you’re just starting a pension, some experts advise dividing your age in two and adding that to your pension as a percentage of your pre-tax salary.

Using this method, if you began at 24, then 12% would be the right amount. If you don’t get underway until 34, you’d need to put in 17%. This includes tax relief and any contributions from your employer.

If you’ve already started, again the key is to keep an eye on your pots and make adjustments where needed.

How to improve my pot (without simply saving more)

If you feel like you’re already putting in as much as you can, there are other ways to add money to your pension.

Tax relief

If you pay tax, you’re entitled to the same rate of tax relief on your pension contributions. This will be done automatically, so if you pay 20% tax, every £100 you put in only costs you £80. You’ll still get this on your contributions even if you don’t earn enough to pay tax.

If you’re a higher-rate taxpayer, i.e., you pay 40% or 45%, you can also benefit from additional tax relief on your pension contributions. This means every £100 will only cost you £60 or £55.

Only 20% is added automatically, so to get the extra, you will need to either fill in a tax return or contact HMRC and tell them. This is particularly relevant if you’ve got a pay rise or promotion that’s taken you into the next tax bracket for the first time, as it’s money you might not be used to claiming.

Planning for retirement can