A little worried about how your pension is shaping up for the years you’ll need financial stability the most? Is the average pension pot in the UK enough? Here we answer all your questions, and help you plan for a retirement you deserve.
How much do you need to save for a carefree retirement? That’s a question many people leave late to answer. Consequently, the average pension pot in the UK is woefully short of what it needs to be to provide a comfortable retirement.
This doesn’t mean you shouldn’t do something about your situation. It’s easier than you think, too. With a little planning, you could boost your retirement lifestyle without crushing your lifestyle today.
Let’s answer the big questions around pension planning:
- How much income do you need in retirement?
- How much do you need to save?
- How can you save for your retirement?
Quick Verdict
The average pension pot in the UK is inadequate to deliver the retirement you desire and deserve.
However, with a little planning you can benefit from an enormous amount of retirement saving help from your employer and the government. In short, you could retire with a pension pot worth hundreds of thousands for a lot less than you think. All you need to know is in this article.
How Big is the Average UK Pension Pot?
Before we get into answering the big questions, let’s look at those average pension savings numbers. These were compiled by the Office of National Statistics in a national survey called the Wealth and Assets Survey:
| Age | Average pension pot |
| 16-24 | £2,700 |
| 25-34 | £9,300 |
| 35-44 | £30,000 |
| 45-54 | £75,500 |
| 55-64 | £107,300 |
It’s not surprising that pensions savings grow as people get older. What might be surprising is that just ahead of retirement, the average pension pot in the UK is only £107,300.
When you consider that you’ll need your retirement savings to last 20 years, £107,300 suddenly doesn’t sound a lot of money, does it? It’s only a little more than £5,000 per year for the remainder of your life in retirement. That’s not going to provide a comfortable retirement.
How Much Do People Live on in Retirement?
The average retirement income in the UK is £349 per week, but this masks the differences between singles and couples:
- For couples, the average weekly income in retirement is £515, or £26,780 per year
- For single people, the average weekly income in retirement is £239 per week, or £12,428 per year
Think about your own situation right now:
- Are you a married couple? Would £515 per week be enough for you to have the lifestyle you desire, even if you have no housing costs?
- If you’re single, how far would £239 per week really get you?
What if you are still paying off your mortgage or renting your home when you retire? How could this impact you financially? (It’s not going to be good.)
What Lifestyle Do You Desire in Retirement, and How Much Will It Cost?
You can’t decide how you need to save toward your retirement without knowing how you want your life to be when you stop working. You’ll have a lot more time on your hands to do the things you love to do or that you have promised you’ll do when you have the chance.
The best way to consider this is to look at the lifestyles of today’s pensioners. This is something the Pensions and Lifetime Savings Association has done. They produced a range of three retirement lifestyles: minimum, moderate, and comfortable. Your retirement income dictates which type of lifestyle you’ll have.
If you’re single:
| Lifestyle | Minimum | Moderate | Comfortable |
| Income | £12,800 | £23,300 | £37,300 |
| Standard of Living | Basic, with a little left for fun | More financial security, with more financial flexibility | You have financial freedom to benefit from some of life’s luxuries |
| Housing | You can decorate one room each year | You’ll be able to afford help with maintenance | A new kitchen and bathroom every 10/15 years |
| Food | £54 a week for food | £74 a week for food | £144 a week for food |
| Transport | You don’t have a car | You can replace a car every 10 years | You can replace a car every two years |
| Leisure and Holidays | One week and a long weekend in the UK each year | Two weeks abroad and a long weekend each year | 3 weeks abroad and long weekends each year |
| Personal and Clothes | Less than £600 per year | Around £800 to spend on clothes each year | £1,500 available to spend on clothes each year |
| Helping Others | £20 for each birthday present | £34 for each birthday present | £56 for each birthday present |
If you’re a couple:
| Lifestyle | Minimum | Moderate | Comfortable |
| Income | £19,500 | £34,000 | £54,500 |
| Standard of Living | Basic, with a little left for fun | More financial security, with more financial flexibility | You have financial freedom to benefit from some of life’s luxuries |
| Housing | You can decorate one room each year | You’ll be able to afford help with maintenance | A new kitchen and bathroom every 10/15 years |
| Food | £96 a week for food | £127 a week for food | £238 a week for food |
| Transport | You don’t have a car | You can replace a car every 10 years | You can replace a car every two years |
| Leisure and Holidays | One week and a long weekend in the UK each year | Two weeks abroad and a long weekend each year | 3 weeks abroad and long weekends each year |
| Personal and Clothes | Around £900 per year | Around £1,600 to spend on clothes each year | £2,500 available to spend on clothes each year |
| Helping Others | £20 for each birthday present | £34 for each birthday present | £56 for each birthday present |
If you live in a big city like London, the income you’ll need at each level of standard of living will be higher, too.
If you want the nice things in life, like holidays, a car, and money for clothes and to treat others on their birthdays, you’re going to need some serious income – before considering any housing costs. Retirement isn’t cheap!
Where Does Retirement Income Come From?
When you retire, you could have pension income from three sources:
- The state pension
- A workplace pension
- A private pension
Most people are entitled to receive the state pension, though you might not receive as much as you think.
All UK companies must offer a workplace pension, but they vary considerably and if you earn less than £520 per month your employer doesn’t have to enrol you.
Which leaves you with your private pension to boost your retirement income.
Let’s examine how each pension works.
The State Pension – Provided by the Government
Like other pensions, what you receive as a state pension depends upon what you have put in. In the case of the state pension, your contributions are calculated by reference to your National Insurance payments:
- If you have paid National Insurance (NI) for less than 10 full years, you’ll receive no state pension.
- With a payment record of between 10 and 34 years, you’ll receive some state pension with the amount increasing with the more years you have paid NI contributions.
- To receive the full state pension, you must have paid in 35 years of full contributions (or be exempt from paying – for example, if you have taken time out from work to look after your children).
Now comes the crunch. How much you will receive…
The full amount is only £10,600.20 per year. That’s some way below the minimum income required for a basic lifestyle. If you are a couple with full state pension entitlement, you’ll just about creep into an income for a no-frills lifestyle.
Depressing, isn’t it?
Which is why you cannot afford to rely on only your state pension.
Workplace Pensions – Set Up by Your Employer
A workplace pension lets you save toward your retirement. Your contributions are taken directly from your salary before income tax is deducted. Most schemes also provide other benefits, like financial support for your partner if you die.
Best of all, if you are entitled to automatic enrolment, your employer must also pay into the scheme for you. That’s free money, and more bang for your buck ─ and makes a dramatic difference to what you’ll receive when you retire.
There are two types of workplace pensions.
Occupational Pensions
There are two type of occupational pension schemes – final salary or money purchase. The income you receive in retirement differs with both:
Final salary schemes pay an income based on your final salary and years of service with the employer. These are the gold standard of pensions, and are becoming much rarer because of their cost to the company when you retire.
Usually, you shouldn’t transfer out of final salary schemes. However, sometimes it can be worth it to do so. When I was offered almost 35 times the annual pension income that I would receive on one of my final salary schemes to transfer out, it was too good an offer to turn down.
Money purchase schemes (also called defined contribution schemes) invest your money. How much pension income you receive depends upon how well the investment performs.
Stakeholder Pensions
A stakeholder pension (or group personal pension) works like a pension that you can arrange yourself. The difference is that your employer chooses the pension provider, though you still have an individual contract with the pension provider.
You don’t have any control over the investments made in the scheme. In many stakeholder schemes, your employer will also pay into the pension for you.
Often, your employer will match your contributions up to a certain percentage, then may add less.
For example, a scheme may allow you to pay in 5% of your salary with the employer matching this (doubling the contributed amount), but if you pay an extra 5%, they won’t pay any more (you get a total of 15% of your salary contributed for the 10% it actually costs you).
If you change jobs, you may be able to:
- Freeze your pension with your old employer (benefits will be paid at retirement)
- Transfer your workplace pension to your new employer’s scheme
- Transfer your workplace pension to private pension
It’s always best to take advice on what is most suitable for you.
Private Pensions – Set Up by You
A private pension is a scheme you set up yourself. You could do this through a financial advisor (you’ll pay fees and commissions, but receive personalised advice) or through a service like that provided by PensionBee.
Like money purchase schemes and stakeholder pensions, how much you will receive in retirement depends upon how well your investments perform. Unlike money purchase schemes and stakeholder pensions, you decide who to invest with and what to invest in.
You will have paid tax on the money you invest into a personal pension (because you pay from your net salary), but then the government pays a tax credit of 25% on your pension contributions.
For every £80 you invest, the government invests another £20 into your pension!
If you pay income tax at higher than the basic rate, you can claim some tax paid at the higher rates via your self-assessment tax return.
If you want to manage your investments yourself, you could opt for a Self-Invested Pension Plan (SIPP). You’ll still get the tax benefits, but you’ll pay lower fees – and if you are investing through funds, you’ll still have professional managers running your investment for you!
If you want to start or transfer existing pensions into a personal pension scheme, then, like PensionBee, apps like Moneybox, Wealthify, and Moneyfarm are easy to use and make the whole process simple.
How Big Must Your Pension Pot Be?
Just how much do you need to save for your retirement?
The answer, of course, depends on your individual circumstances, and what lifestyle you want when you retire. It depends on if you’re single or in a partnership, and how much state pension you will receive.
It’s a complex calculation, but let’s make it as simple as possible.
Step 1: What lifestyle do you want?
Do you want to live like a pauper or a king?
Let’s say you’re single, and want a more luxurious lifestyle. You’ll need £37,300 income to live comfortably, based on today’s income levels.
Step 2: How Much State Pension Will You Receive?
Now, figure out how much state pension you will get. This is easy to do. Simply type this into your Google search bar: https://www.gov.uk/check-state-pension.
You’ll need your National Insurance number to get started, but within a couple of minutes you’ll have an accurate state pension forecast from the government!
For this example, we’re going to say that you will benefit from a full state pension of £10,600 per year.
Step 3: Calculate Your Income Shortfall
Okay, now deduct your state pension and work pension from your desired income.
In this case, it’s £37,300 ─ £10,600. You’ll need a pension pot that pays out £26,700.
Step 4: Calculate the Pension Pot You’ll Need
To do this, you can use a simple formula or a pension calculator like that provided by PensionBee (this can be fun, too, and show you a range of options, like different retirement ages, taking your tax-free cash, and different contribution amounts, and it shows you how long your pension pot will last).
The simple calculation is to take 4% of your pension pot each year. This should last you around 20 years, allowing for annual management fees on your pension. To work out how much you’ll need to save, make this calculation:
(Income needed/4) x 100
In our example, you would need:
(£26,700/4) x 100 = £6,675 x 100 = £667,500
Yep, a lot of money.
Calculate How Much You Need to Save in Your Pensions
How will you save £667,500 in a pension pot?
Rule 1: use the power of compounding and time.
Compounding is what Warren Buffett (the multi-billionaire investor) has called the most powerful factor behind his success.
Albert Einstein called it the eighth wonder of the world. It’s easy to understand, too: instead of withdrawing your interest or dividends, you reinvest them and earn interest on your interest.
The longer you leave it invested and reinvest the interest or income, the bigger and faster your pot grows. Like a snowball rolling down a hill.
Rule 2: invest constantly, continuously, and as early as possible.
Keep ploughing money into your pension pot. The earlier you invest, the longer it will have to grow and benefit from compounding. Don’t miss a payment, either. It’s hard to catch up, and you should always pay yourself first. Look at it as an investment in your future.
Rule 3: take advantage of your employer!
If your employer will pay into a workplace pension to add to your contribution, then take advantage of this! You’d be mad not to – and I really mean this!
So, how much do you need to save to reach your £667,500 target?
If you are 25 today and your investments grow at 5% annually, you’d need to save £450 per month. A lot of money, right?
Let’s think about this because there are all sorts of considerations to make.
For example, if your employer will match your contribution into your workplace pension up to 5% on qualifying earnings of £23,760 per year based on a salary of £30,000, your total monthly contributions will be £198. But this includes tax relief of £19.80 and your employer’s contribution of £99. The £198 saving only costs you £79.20.
You now only have £252 to find to save. More good news here. You open a personal pension scheme and get tax relief on your contributions. You won’t need to save £252, but only £201.60.
In short, in this example you won’t need to save £450 per month. You’ll need to save £280.80 to benefit from £450 of pension contributions each month, and the compounding it delivers!
(Oh, your investment grows tax-free in a pension fund, too!)
How Much Are You Allowed to Save?
The tax advantages of pension schemes are so good that the government limits how much you can invest in pensions (though you can have as many pensions as you like now).
Although there are some complex rules involved, the main one to bear in mind is that you cannot invest more than 100% of your salary or £60,000 (whichever is lowest) in your pensions in any tax year.
Don’t Neglect Inflation
There’s one problem with all the above recommendations and ideas and calculations: inflation. £37,300 might be enough to provide a comfortable lifestyle for the single you and £54,500 for a couple today, but the cost of living rises each year.
You’ll need to consider this, and increase how much you are contributing to your pension schemes:
- State pensions rise in line with inflation.
- With a workplace pension, inflation-proofing is done for you. As your salary rises, so too will the amount you and your employer contribute.
- For personal pensions, you’ll need to adjust your contributions manually.
It’s worth committing a little time to reviewing your pensions at least once a year (I review mine every six months). This gives you the chance to monitor your investments, take stock of your evolving personal situation, and make changes as needed.
Start Saving for Your Retirement Today
However long you have before retirement, it is never too late to review your pension arrangements and start saving toward a pension pot. With the tax advantages of investing in a pension scheme, your money could grow by 25% virtually overnight.
We can’t give personalised advice, and your unique situation means unique needs and means, but you now have more options than have ever been available to create an income in retirement.
For example, if you have been maxing out your ISAs for the last 10 years, you could easily have £200,000 or more invested.
Should you leave this where it is and benefit from tax-free income from the ISAs in retirement, or should you drip feed this into a personal pension and benefit from the tax relief on your contributions (that £200,000 could become £250,000 by doing so)?
Maybe you are a few years away from retirement, but have recently paid off your mortgage. First, congratulations. Having no mortgage with the safety of a roof over your head is a great feeling.
Now, what are you going to do with the few hundred pounds of extra disposable income you have each month? How about saving for a more comfortable retirement lifestyle and getting the government to pay toward it?
Options for Your Pension Pot in Retirement
Retirement options are very flexible today. If you’ve been investing in a pension scheme, you’ll have a much more care-free and happy retirement to look forward to. What can you do with your pension pot?
First, understand that you cannot claim your state pension until you reach 66 years old (which will soon rise to 68).
However, you can access benefits from your personal and workplace pensions much earlier if you wish – currently that’s age 55, though this is rising to 57 from 2028. At this age, you could:
- Leave your fund intact and keep investing; or
- Take a 25% tax-free cash lump sum and leave the rest invested; and/or
- Take an income; and/or
- Defer an income; and/or
- Take flexible income from your pension pot
Simplifying Your Pension Planning
After a lifetime of work, changing employers, and paying into private pensions, you could have several pension schemes open at the same time. This can be advantageous – not all your money is in a single pot, and spreading it around can smooth performance as well as make it safer.
However, it can be challenging to track several pension pots, and when it comes to retiring you’ll have many individual bundles of paperwork to administer – a potential nightmare!
For this reason, many people (me included) choose to amalgamate their many pensions into a single, easy-to-administer pension pot. This is called pension consolidation, and is easy to do.
Simplification wasn’t the only reason I consolidated my pensions. By doing so, I could:
- Easily track my pension, never ‘losing’ a fund again
- Keep updated with a single statement
- Reduce my fees
- Boost my fund growth by using a better fund provider
To consolidate your pensions, here’s what to do:
- Trace your existing pensions ─ contact former employers to find out about pension providers they use, or use the government’s pension tracing service.
- Select a pension provider, and provide them with the details of your pension policies.
- Let the pension provider do the rest!
It can take up to three months (sometimes a little longer) for the provider to work their magic, but after a while you’ll receive a statement that shows all your pensions consolidated into a single policy.
Even if you are not considering consolidating your pensions, it could be worth tracing your pensions. When I went through this process, I found a workplace pension that I didn’t know I had.
I’d only worked for the employer for a couple of years, and hadn’t contributed to a pension scheme. However, I discovered that I was entitled to a non-contributory pension scheme with a transfer value of around £55,000!
The Bottom Line
Working out how much you’ll need to amass to have a comfortable retirement can be shocking.
Working out how much you need to save can be disappointing.
Realising that your employer and the government could put a huge amount toward this should be motivating.
Understanding that your money can grow fast thanks to compounding and time invested tips the investment scales firmly your way.
By following the golden rules we’ve detailed in this article, and adjusting the step-by-step approach to working out how much you need to save to your personal circumstances, you can start to create your lifestyle retirement sooner rather than later.
Don’t be caught out with an average and, quite frankly, inadequate pension pot in the UK. Yes, the state pension is there to help you, but it will never be enough to provide the retirement you desire and deserve.
The time to act is today, and then keep your pension planning under review at least once a year.