Why Invest In a Pension?
Millions in the UK aren’t saving enough for retirement and face three options:
- Work longer.
- Start investing more in a pension.
- Lower your expectations regarding your living standards in retirement.
Don’t depend on the State Pension. It’s only £203.85 a week or £10,600.20 a year for 2023/24. However, the amount you get may vary from this figure depending on your National Insurance (NI) record. This is far below what most retirees would require to have a decent standard of living.
Median Amount of Pension Pots by Age in Great Britain
The table below shows the median amount of pension pots by age in Great Britain.
| All pension types | |
| Age Group | April 2018 to March 2020 |
| 16-24 | 2,700 |
| 25-34 | 9,300 |
| 35-44 | 30,000 |
| 45-54 | 75,500 |
| 55-64 | 107,300 |
| 65+ | 81,100 |
These amounts are very low and will not give even a minimum retirement living standard for a single person living outside London.
Why are the Median Pension Pots So Low?
The MAS, UK Financial Capability Survey found that:
- 77% don’t know how much they need in retirement so aren’t sure how much they need to save.
- Only 16% can give the figure they will need in retirement.
- 51% believe the minimum auto-enrolment rate is enough.
- 51% of people focus on their current needs and wants rather than investing for the future.
- 70% of self-employed 35-54-year-olds have less than £25k of pension savings.
- Financial literacy is poor e.g., many savers do not understand the impact of inflation on their savings.
How To Improve?
- 70% said pension targets would help them plan more.
- 74% believe that Retirement Living Standards would help them plan for retirement.
The 4% Rule
The 4% Rule is a guideline for retirees to spend 4% of their savings annually, starting at retirement. This can make their savings last for a projected 30-year retirement and provide a stable income.
As an example, take the highest median figure of £107,300 from the above table. Using the 4% rule, this will only provide an income in retirement of £4,292 per year which is a paltry £357.67 per month. That would only cover some monthly utility bills so is way below the minimum required.
Required Retirement Living Standards
Have you thought about the kind of retirement you would like?
- Where would you like to live?
- What type of property would you like to live in?
- What hobbies would you like to continue or take up?
- How many holidays would you like a year?
- What type of car do you want to drive?
- How often do you want to change your car?
The tables below show what you need if you are single or a couple, live in or outside London and the type of living standard you want in retirement.
Single Person’s Potential Retirement Living Standards
| MINIMUM | MODERATE | COMFORTABLE | |
| SINGLE | £12,800 a year £14,300 – London | £23,300 a year £28,300 – London | £37,300 a year £40,900 – London |
| POTENTIAL STANDARD OF LIVING | Covers all your needs, with some left over for fun | More financial security and flexibility | More financial freedom and some luxuries |
| HOUSE | DIY maintenance and decorating one room a year. | Some help with maintenance and decorating each year. | Replace kitchen and bathroom every 10/15 years. |
| FOOD | £54 a week on food (incl. food away from home). | £74 a week on food (incl. food away from home). | £144 a week on food (incl. food away from home). |
| TRANSPORT | No car. | 3-year-old car replaced every 10 years. | 2-year-old car replaced every five years. |
| HOLIDAYS & LEISURE | A week and a long weekend in the UK every year. | 2 weeks in Europe and a long weekend in the UK every year. | 3 weeks in Europe every year. |
| CLOTHING & PERSONAL | Up to £580 for clothing and footwear each year. | Up to £791 for clothing and footwear each year. | Up to £1,500 for clothing and footwear each year. |
| HELPING OTHERS | £20 for each birthday present. | £34 for each birthday present. | £56 for each birthday present. |
A Couple’s Potential Retirement Living Standards
| MINIMUM | MODERATE | COMFORTABLE | |
| COUPLE | £19,900 a year £22,400 – London | £34,000 a year £41,400 – London | £54,500 a year £56,500 – London |
| POTENTIAL STANDARD OF LIVING | Covers all your needs, with some left over for fun. | More financial security and flexibility. | More financial freedom and some luxuries. |
| HOUSE | DIY maintenance and decorating one room a year. | More financial security and flexibility. | More financial freedom and some luxuries. |
| FOOD | £96 a week on food (incl. food away from home). | £127 a week on food (incl. food away from home). | £238 a week on food (incl. food away from home). |
| TRANSPORT | No car. | 3-year-old car is replaced every 10 years. | Two cars, each replaced every five years. |
| HOLIDAYS & LEISURE | A week and a long weekend in the UK every year. | 2 weeks in Europe and a long weekend in the UK every year. | 3 weeks in Europe every year. |
| CLOTHING & PERSONAL | £460 per person for clothing and footwear each year. | £791 per person for clothing and footwear each year. | Up to £1,300 per person for clothing and footwear each year. |
| HELPING OTHERS | £20 for each birthday present. | £34 for each birthday present. | £56 for each birthday present. |
Pension Pot Required for Each Living Standard
So, how much of a pension pot would you need based on your required living standard? Using the 4% rule, I have reverse-engineered the amount required to give you an annual income based on your status, where you live and the required living standard.
| Status | Retirement Living Standards | Location | Annual Spending in retirement £ GBP | Required Pension Pot £ GBP |
| Single | Minimum | UK excl. London | 12,800 | 320,000 |
| Single | Minimum | London | 14,300 | 357,500 |
| Single | Moderate | UK excl. London | 23,300 | 582,500 |
| Single | Moderate | London | 28,300 | 707,500 |
| Single | Comfortable | UK excl. London | 37,300 | 932,500 |
| Single | Comfortable | London | 40,900 | 1,022,500 |
| Couple | Minimum | UK excl. London | 19,900 | 497,500 |
| Couple | Minimum | London | 22,400 | 560,000 |
| Couple | Moderate | UK excl. London | 34,000 | 850,000 |
| Couple | Moderate | London | 41,400 | 1,035,000 |
| Couple | Comfortable | UK excl. London | 54,500 | 1,362,500 |
| Couple | Comfortable | London | 56,500 | 1,412,500 |
As you can see, even the highest median amount of £107,300 is over £200k below the £320k required to give you a minimum retirement living standard as a single person living outside London.
As a couple, living in London, requiring a minimum retirement living standard, you’d still need a £560k pension pot.
Moreover, for a comfortable lifestyle for a couple living in London in retirement, you’d need a whopping £1.4m!
Know The Type Of Retirement You Want and Plan For It
It is imperative that you save into a pension to ensure that you have enough money to retire as comfortably as possible.
Using the retirement living standards above and the associated figure for the pension pot required would help you understand how much you need to invest every month to reach your retirement goal.
Do you have any further advice to add regarding investing in pensions and retirement goals? If so, please leave your thoughts in the Comments section.
Thanks for reading!
DISCLAIMER: Inquisitive Finance operates on principles of exchange of knowledge, ideas and opinions and learning in the community. Your decisions are entirely your own responsibility, and I am in no way responsible for your actions. I am not a financial advisor. Whilst I strive to provide accurate and up-to-date information, I make no warranties or representations as to the accuracy or completeness of this information. Use common sense, do due diligence and where necessary, use the services of a licensed financial advisor, before making any financial decision and/or transaction.
Being realistic about the size of the pension pot for comfortable retirement, the thought of high or, worth, hyper-inflation is terrifying. Imagine working and saving all life, only to see the pension fund diminish (buying power of money) into a sum sufficient to survive a couple of years ….
Acquiring tangible durable assets, preferably highly liquid ones, as well as saving into a private pension is a reasonable retirement strategy?
You make a good point. Having a diversified portfolio of assets will mitigate risk. Hedges against inflation include rental income from buy-to-let property, gold, commodities, treasury inflation-protected securities etc.