Will you be able to climb the ‘pension mountain’?

Financial News

How do you feel about climbing mountains?

What if the mountain in question is hypothetical and merely represents the amount of money you need to save to have a comfortable retirement?

It might still sound daunting to some but saving enough doesn’t have to be an uphill struggle.

Figures from Royal London show that since 2002, the amount needed to support a comfortable retirement has grown from £150,000 to £260,000. Further still, today’s young adults are likely to need to have saved almost £200,000 more than that, especially if they continue to rent, rather than buy, their homes.

What this amount will (and won’t) cover

The estimated total retirement fund needed for today’s retirees, £260,000, is based on an average earner, aiming for a retirement income of two-thirds of their full-time pay. For an average salary of £26,872 per year (Source: Office for National Statistics), that means they will need to aim for an income of £17,819 in retirement.

Someone eligible to receive the Full State Pension can expect £8,546 per year, which leaves a shortfall of £9,273.

To bridge that shortfall, one option would be to purchase an Annuity.

Currently, to provide an index-linked income of £9,273, an Annuity will cost £260,000, according to Royal London.

The Annuity and State Pension combined, should provide a comfortable income in retirement, if they continue working until they reach 65, and do not intend to leave any provisions for their spouse or loved ones when they die.

However, this income does not account for the need to make mortgage or rent payments, as the number of pensioners who own their home outright is still very high. Unfortunately, the same will not be true for those who will be retiring in 30 – 40 years’ time.

Retirement and rent

The average annual private rental costs total £6,554.

According to the research, less than a quarter of over 65-year-old household heads were renters rather than homeowners, during the 2016/17 tax year. However, as the number of homeowners continues to fall, more people will need to take the added costs of renting into consideration when calculating how much they will need to retire comfortably.

What is the cost of renting?

According to Royal London, the average annual cost of a privately rented home is £6,554, though this figure will obviously vary between regions. When added to the previous calculation, this means that those who will continue paying rent in retirement will need approximately £445,000 in retirement capital.

There’s more to the story

Of course, the amount of money needed to support you in retirement will fluctuate as your lifestyle and circumstances change. This means factoring in:

  • The activities you plan to take part in when you retire
  • How active your lifestyle will be as you get older
  • The possibility of needing to pay for care or accommodation in your later years
  • Provisions for leaving a legacy to your loved ones when you die

This means that, while ensuring that you have enough to provide the income needed to cover your living costs and support the lifestyle you want when you retire is important, you will also need to plan how you will pay for those times when extra cash is needed.

Your mountain-climbing guides

Without using any of the help, programmes or schemes available, saving for a retirement fund over a 40-year career would require you to put away:

  • £541 per month for a total of £260,000
  • £927 per month for a retirement fund of £445,000

The good news is you don’t have to save all of this on your own, there are hands pulling you up the pension mountain:

First, if you are employed and earning more than £10,000 per year, you should already be enrolled into a Workplace Pension. If not, ask to be included as soon as possible, to maximise the contributions you will receive. Both you and your employer will make monthly contributions to your pension, meaning that you get an extra boost toward your retirement goals.

Secondly, your pension will attract tax relief, which increases your contributions by 20% or 40%, depending on your tax rate, that means that, for every £80 you pay in, you could see £20 or £40 added to your pension.

The third factor is investment returns. Whilst investments carry risk and returns are not guaranteed, carefully-managed investments should show growth in the long-term.

Together, these factors mean that you don’t have to contribute every penny of your target retirement fund yourself.

Furthermore, financial planning can help. After all, you wouldn’t expect to successfully climb a mountain on your first try, without a guide, would you?

Engaging with a financial planner will give you a better insight into how much you will need when you retire and how you can make sure you are putting enough away now, to provide for yourself in later life.

Research has shown that those who seek professional financial advice benefit from an average of £98 per month in additional retirement savings, which could lead to a boost in annual retirement income of £3,654; that’s almost half a year’s rent.

For more information, or to talk to a professional about your retirement finances and plans, get in touch with Sarah or Bev on 0115 933 8433