Saving for retirement

Saving for retirement can seem daunting, with so many different types of pension and savings accounts to choose from. To help get you started, let’s work out what you might need, so you can decide how and when to invest for your retirement.


Episode 4: It’s never too late to start investing

Who says you need to start investing between age 20 and 30? Not our experts, who in this episode explain why it’s never too late to get started with a pension.

Listen to our Investing Essentials podcast

How much do you need to retire?

It all depends on what you want your retirement to look like, and how much that might cost.

A good place to start is with what you spend now. What are your ’must haves’ in retirement; things you want to keep up or maybe even increase, such as holidays abroad or hobbies? And what expenses are likely to reduce or even disappear when you stop working? Examples might include commuting costs or educational support for your children.

Once you have an idea of the kind of lifestyle you want, the Pensions and Lifetime Savings Association’s (PLSA) Retirement Living Standards research can help you figure out how much you’ll need for retirement. The research estimates three different levels of income most people will fit into when they retire, based on three standards of living: ‘minimum’ (basic), ‘moderate’, or ‘comfortable’.

The standards put a cost on what each level looks like, and what a range of common goods and services would cost for each. For example, the moderate living standard allows for some help with house maintenance, a used car and one two-week holiday abroad every year. It also allows around £74 per week for food and money to spend on clothing and personal items.

Retirement Living Standard Annual income needed (according to the PLSA) Annual income needed after deducting full State Pension
Minimum £12,800 £2,200
Moderate £23,300 £12,700
Comfortable £37,300 £26,700

Source: PLSA. Income levels shown for a single person living outside London. More figures available at retirementlivingstandards.org.uk

How much does the State Pension cover?

At this stage you might be wondering how far the Government’s State Pension can get you? Well, the maximum State Pension is currently £10,600 a year, based on 35 ‘qualifying’ years of National Insurance payments. That means, looking back at the PLSA’s figures, even if you can claim the full State Pension, it’s unlikely to give you enough annual income for the lifestyle you want in retirement.

Another important point to bear in mind about the State Pension is you can only start claiming it from age 66 at the earliest, and this is likely to increase in future. So, if you want to retire before then, you’ll need to make sure your personal savings can cover you entirely until the State Pension kicks in, and enough to make up any shortfall once it does.

How much should you save for your pension?

Using the tips and information above, you can work back from how much you’ll need to retire and by when, and what you currently have in your retirement ‘pot’. Then you can figure how much more you’ll need to save to make up the difference.

If you’re employed, it’s likely that you’re already saving for your retirement into a workplace pension. Thanks to auto-enrolment, if you’re 22 or over and earning more than £10,000, a minimum of 8% of your (qualifying) earnings, with at least 3% of this coming from your employer, should be going into your pension. While auto-enrolment has been great at getting more people paying into a pension, it’s unlikely that the minimum contributions will build a substantial pot.

Let’s take the PLSA’s moderate retirement living standard for a single person. In today’s money, an income of £23,300 per year is needed for this. After deducting the current full new State Pension, you’d still need around £250,000 saved into a pension the time you reach State Pension age. Although, this should be more if you want to retire early and/or want your potential retirement income to rise in line with inflation. Your workplace pension can help you reach this figure, but you may need other sources of savings to make sure your retirement is comfortable.

Here are some examples to help put workplace pension savings into context.

A 22-year-old earning £25,000 per year, with 8% of their salary paid into a workplace pension (3% coming from their employer), could achieve a pot of around £150,000 by the State Pension age.

A 33-year-old earning £38,000 with a workplace pot already worth £10,000 could get closer to £175,000 by the time they’re 68, based on the same contribution rates.

Examples illustrate potential total workplace pensions savings built up by State Pension age. Both examples assume no career breaks and annual investment growth of 5%

What is the best way to save for retirement?

There isn’t a one-size-fits-all solution here. It does all depend on your personal circumstances. The good news is you have options, a couple of which we’ll go on to explain in more detail. Just remember, the best option for you will depend on:

  • Your age
  • Your tax rate (now and what it might be in retirement)
  • Whether you’re employed or self-employed
  • When you want to start accessing your retirement savings

Pensions

All pensions are designed specifically to help people who are saving to retire. From workplace pensions set up and supported by your employer, to private or personal pensions, such as Self-invested Personal Pensions (SIPPs), that you set up and manage yourself.

One way you can increase how much you’re saving for retirement is by increasing your contributions to your workplace pension. It’s also worth checking with your employer if they’ll pay more into your pension to match this – known as ‘matched contributions’. This could mean the extra amount you pay in is boosted even further.

Button: Find out more about employer contributions

Just like your workplace pension, you’ll get great tax benefits from saving into a SIPP. For every £4 you save, the Government will add an extra £1 in tax relief. Find out more about how paying into your pension works, its benefits and annual limits in our contributing to your pension article.

Read more about our SIPP

Pension builder fund
Pension builder fund

Our low- cost fund, designed to help you save for your retirement, managed by our in-house experts

Pension builder

If you work for yourself, you won’t usually be auto-enrolled into a workplace pension scheme, but you can still save for your retirement and earn tax relief with a personal pension. And if you own your business, you could also consider paying part of your salary directly into your pension as an employer contribution. This can have the added benefits of reducing your business’s liability for corporation tax, and your personal liability for income tax.

Read more about pensions for the self-employed

Lifetime ISAs

Lifetime ISAs may not spring to mind when you first think of saving for retirement, but they can also be used for this purpose. A Lifetime ISA gets you a 25% bonus from the government on the amount you pay in, but you’ll need to be under 40 to open one for the first time. As with other ISAs, your investments are sheltered from tax, but you’ll need to wait until you’re age 60 to access a Lifetime ISA or be hit with a 25% government penalty charge.

Lifetime ISAs are particularly useful if you’re self-employed, or you’ve already maxed out your pension saving allowances. Tax benefits will depend on your personal circumstances - but a good rule of thumb is if you’re a higher rate tax payer, you’ll usually be able to claim back more in pension tax relief than the value of the Lifetime ISA bonus.

Both pensions and Lifetime ISAs have restrictions on what you can pay in and when you can access them, so make sure to check these out before you open one. And if you opt to pay into a Lifetime ISA instead of your workplace pension scheme, you’ll miss out on what your employer would pay in too.

More on Lifetime ISAs

Learn more about how to invest in your pension and boost your retirement savings.

What age can you start a pension?

You can open and manage your own pension from age 18, but the choice can be bewildering at such a young age, and too often we leave it for another day when we’ll have fewer competing priorities for our money. The thing to bear in mind is, the earlier you start saving for retirement, the longer your pension will have to grow, and the less pressure you’d need to put on your finances in later life.

Case study: Millie is 50 and wants to retire at 60

Mille

She is working and has a pension with her employer that will be worth about £300,000 when she retires. She wants to increase that to £400,000 by the time she retires, to generate an estimated income of £20,000* in addition to her state pension.

At age 50 she will need to save £6,700** a year into a personal pension or SIPP for 10 years which will equal total payments of £67,000. This will grow in value to £100,000 boosted by the Government tax relief and investment growth.

If Millie had started paying into her pension earlier her annual saving would be far lower as there would be more time for investment growth**. So at:

  • 40 she would only have to save £2,700 per annum (total £54,000)
  • 30 she would only have to save £1,430 per annum (total £42,900)
  • 20 she would only have to save £850 per annum (total £34,000)

*Assumes an annuity rate of 5%
**Assumes lump sum contributions at the beginning of each tax year, 20% tax relief and investment growth of 4%

If you’re a parent and want to give your child a head start on saving for their retirement, you might consider opening and contributing to a Junior SIPP. You can open one from the day they’re born, and anyone can pay into it. Plus, they’ll benefit from basic rate tax relief (20%) from the Government on anything you pay in.

Read more about our Junior SIPP

Need more help? Pension Wise

While we can give you useful information, AJ Bell doesn’t give financial advice

If you need help finding a pension or investments suitable for your needs, please speak to a financial adviser. If you’re 50 and over and want to understand more about your options at retirement, the government also offers a free and impartial guidance service, Pension Wise.

Investing in later life

Finding income-paying investments for your retirement can be hard. But we can help with our Ready-made portfolios and funds.

Investment options

Choose from a wide range of investments including shares, funds, investment trusts and ETFs.


Related content

Investing in the FTSE 100
- Fri, 23/02/2024 - 17:03

What happens to a Junior ISA at 18?
- Fri, 23/02/2024 - 16:33

Additional permitted subscription (APS)
- Fri, 23/02/2024 - 15:28

What happens to my ISA when I die?
- Fri, 23/02/2024 - 11:59

Bed and ISA
- Mon, 05/02/2024 - 14:54