How much do I need to save for an average retirement income?

The gap between the amount of money people think they need, and what they actually require for a happy retirement can be huge, and sometimes life changing. Yet, according to our recent research - “What’s Your Number” - just 12% of under 55s have set a target for their pension pots, meaning around 18 million UK adults could be heading for a retirement nightmare.

The question is – are you one of them?
When we asked a representative sample of UK adults what their top priorities are for retirement, their top two were ‘not to have to worry about money’ and ‘maintain my current standard of living’. These goals are fundamentally important to basic happiness, which makes it even more bewildering that so many UK adults are not meticulous in their financial planning for retirement.

The difference between expectation and reality

When asked, the average income people feel they need in retirement to achieve their goals is £34,000 a year. But at today’s rates, you would need to have £903,000 in pension savings to achieve that (assuming you plan to take an annuity at age 65, and an upfront 25% tax free lump sum).[i] And that doesn’t allow for leaving money to your spouse or civil partner should you die before them. In reality, the average UK adult has a target pension pot of £355,000, which would generate an estimated annual income of £13,000, some £20,000 below their desired income.
So, why have we ended up with this gulf between expectation and reality? Our research found that people are simply not prioritising retirement financial planning. Staggeringly, just 7% of UK adults know the age they would like to retire, and only 3% say their target retirement pot is among the most important numbers to know. Indeed, more than three quarters of UK adults have not set a savings target for retirement.

The repercussions of not planning for retirement

Like anything in life, burying your head in the sand won’t make the problem go away. Apart from simply not having enough money to enjoy retirement, you may not be able to retire at all.
When we asked people how confident they were about being able to retire when they want to, the findings were alarming. As you can see from the graph, over a third of people aged between 45 and 54 have little confidence of when they will be able to retire, and it’s not much better for those approaching retirement age.

An average of 14% of UK adults are already planning to work beyond age 65, and this rises to one in five (21%) of under 35s. While working longer could be a good solution, particularly if you are fit and healthy, it can also be a risky strategy. What if you suddenly find yourself in longer-term ill health, or if you arrive at retirement age and decide you would like to give up work after all. You might have grandchildren to care for, hobbies you would like to pursue, or you may just feel tired and bored of working. It’s always good to have the option to work longer, but when the time comes, you don’t want to find yourself forced into it.

Bridging the retirement savings gap

So, what can people do to bridge the retirement savings gap?

  1. Stop procrastinating

It doesn’t matter what age you are, now is the time to make a financial plan for retirement. You are never going to get any younger so the sooner you start, the easier it will be. If you’ve left it late, you may think it’s a lost cause, but that makes it even more critical to face up to the reality of what retirement will mean for you.

  1. Know your starting point

You need to know what you have in the way of savings and investments. It often makes sense to consolidate your pensions at this point, assuming you don’t lose any valuable guarantees in the process. By bringing them into one place, they can be easier and cheaper to manage, and you can keep a closer handle on how much your overall pension savings are worth.

  1. Think carefully about what you will need in retirement

It’s not easy to imagine what retirement might look like – especially if it’s 20 to 30 years away. But assuming you will want to live a reasonably active life, you can estimate how much you will need to live on (in today’s money) to live a happy and fulfilling life that isn’t a million miles away from the life you lead today.

  1. Consider staying invested in retirement

More and more investors are keeping their pension savings in income drawdown well into retirement – rather than locking into an annuity. The difference is that, while an annuity will guarantee you a set income for life, income drawdown gives your savings the opportunity to grow in value throughout retirement. Some investors decide on a combination of the two.

  1. Consider other sources of income

Our research found that 18% of people expect to rely on money tied up in their homes by either downsizing or using equity release. You should also factor in any other savings and investments you have such as ISAs or rental property. You could even consider renting out a room in your home.

Seek help from an expert

If all of this feels rather daunting, then you should seek help from an expert. Contrary to popular belief, you don’t need to be rich to afford a financial planner. They can help you think practically about retirement, establish your goals, and then put measures in place to achieve them.
It’s never too early to start, and it’s never too late, but if you want to stand a chance of achieving a £34,000 a year income in retirement, then you need to start now.


[1] Source: The pension savings assumption is based on a single life annuity with equal rest of life payments.


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