Pensioners will need £800,751 pre-tax in retirement expert says

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With the cost of living and a recession on everyone’s minds, people are starting to wonder how this season will impact their retirement in the future and with that comes many other questions. One of these questions is “how much should I have saved for my pension?” which many people will need to know to start planning effectively.

Financial experts at Private and Commercial bank Arbuthnot Latham have researched the estimated amount that people may need.

The amount someone needs to save toward their pension depends on how much they want to live on when they retire.

To take a simple example, the mean UK average wage is £38,131.

If someone was earning the UK average wage upon retirement today, assuming a retirement age of 65, and wanted to maintain their current lifestyle, data suggests that the average person would need enough in their pension pot to guarantee that income for around a 21 year retirement, based on current life expectancy statistics.  

That works out to needing £800,751 – pre-tax, they suggested.

Chris Allen, Director, Wealth Planning, Arbuthnot Latham said: “It is important that you take steps to save for your retirement, in addition to the state pension, to ensure that you can not only maintain the standard of living you wish to but also enjoy your retirement years.

“The new state pension (assuming you have the full entitlement) is £185.15 per week. There is a need to plan to ensure you can maintain your desired standard of living in retirement.

“With the cost of living increasing, it is more important than ever to ensure you plan as early as possible for your retirement and set aside additional provisions away from the state pension, it’s not enough to maintain the standard of living you wish.”

However, there are other important considerations that a simple calculation does not account for, and cashflow modeling is a better way of working out how much people might need, he explained.

Cashflow modeling considers factors beyond just individual own goals, like inflation and the assumed growth in the value of one’s investments.

It can also consider one-off events such as downsizing the home or receiving an inheritance.

This can help form a picture of how much people need to save each month.

How much money should people save each month for their pension?

Mr Allen explained that the benefit of compounding means that gains – in theory – get exponentially bigger over a longer period.

He continued: “So, the earlier you start, the more you can amass over time.

“With any excess income, it is important to balance the amount you pay into your pension with your other needs.

“A wealth planner can help you find the optimal mix.”

The “best way” to save for a pension
Whatever the goal, it will be difficult to reach these figures simply saving by oneself, he suggested.

While there are many types of personal savings plans available, many use their work-provided scheme as their main form of pension planning.

Schemes can differ, but they can offer some or all of the following benefits.

Tax efficiency – pension contributions are often deducted before tax and National Insurance contributions are calculated, although be aware there are limits to your tax-free allowances.

Assets inside a pension grow free from income tax and capital gains tax (and can be passed on free of inheritance tax).
Employer contributions – employers must contribute a percentage towards your workplace pension.

Compound gains – if it is invested well, the pot also grows over time above your own investment.

The “crucial component” here is the compounding factor and this is why it is so crucial to begin saving as early as possible for your pension.

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