How much pension do I need to retire?

We explain how to work out the retirement income you'll need, and what you can do if you haven't saved enough.

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It’s the million dollar question. How much do you need to enjoy retirement? While many people won’t actually need a million dollars (or pounds), nobody wants to be living on the breadline in later life. In this guide, we outline the key things you need to think about. One thing’s for certain, the earlier you start saving for retirement, the better your chances will be of enjoying the retirement lifestyle you want.

How much money do I need to retire?

It’s difficult to generalise how much money you need to retire as it’s contingent on many factors. These might include whether you live in an expensive or less expensive part of the country, whether you have any outstanding debt and any dependants you have. Plus, of course, the style of living you want. If you love fine dining and plan to take regular exotic holidays in retirement, you’ll inevitably need more money than if you love cooking your own meals from home and prefer the odd staycation.

How much do I need saved to retire in comfort?

If you want to enjoy your “golden years”, the best thing you can do is sit down and work out a likely retirement budget that takes into account both essentials (what’s the minimum you can get by on) and desirables. Those holidays and meals out, for example.

Bear in mind that there’s a good chance that you won’t need quite as much income in retirement as you do before you retire. For example:

  • Many people that own their home will have paid off their mortgage by the time they retire. If this applies to you, this will eliminate a decent chunk of your monthly outgoings. Research from market data provider Statista shows that, as of 2020–21, owner-occupiers spent an average of 18% of their income on their mortgage.
  • You don’t pay National Insurance on income from a pension – or on any income when you reach State Pension age.
  • You may be eligible for certain discounts and benefits aimed at older people.
  • You may make transport savings by no longer having to commute to work.

As a rule of thumb to estimate how much you might need, you could use MoneyHelper‘s “suggested target income” for different salary ranges. Based on research by the Department for Work and Pensions into people’s income needs in retirement, MoneyHelper’s figures suggest what percentage of salary you might need in retirement for people at different levels of income.

Salary range (per year)Percentage of salary needed in retirement
Up to £12,19980%
£12,200-£22,39970%
£22,400-£31,99967%
£32,000-£51,29960%
£51,300 and above50%

How can I work out my retirement income budget?

Planning how much you’ll need to live happily in retirement may seem like a tricky challenge, especially if you’re still years away from retirement and have no idea how your life will pan out. In your 20s, you may not know what you want to do “when you grow up”, much less whether you’ll get married, have kids and buy a house. But it’s an important step in working out how much you need to be squirrelling away into retirement savings.

MoneyHelper’s suggested target incomes can give you a broad idea, but your expected outgoings may be higher or lower than average. There are retirement budgeting tools online that can help you get a more tailored estimate, including those offered by some pension providers. Just search for something like “retirement budget calculator”.

One important factor to bear in mind is whether you’ll be eligible to receive the state pension and, if so, how much. The maximum amount you can receive (as of the 2022–23 tax year) is £185.15 a week (or £9,627.80 a year).

Does it matter how early I start saving for my pension?

You already know the answer to this. Of course it does. It goes without saying (though we’ll say it anyway): the younger you are when you start putting money into retirement savings – typically a pension – the more you’ll have to live on when you retire.

That’s for at least 2 key reasons:

  1. Assuming you put money into your pension on a regular basis, the earlier you start, the more you’ll contribute. Plus you’ll have longer to benefit from tax relief on those contributions. For the sake of simplicity, let’s say you make contributions of £100 a month into a personal pension for as long as you’re paying in. After tax relief that’s £125 a month. If you start at age 45, those contributions will add up to £30,000 by the time you retire at age 65. Start at 25, and retire at the same age, that’s a much healthier £60,000. Plus, if you have a workplace pension, your employer will contribute to your pension too.
  2. So far so obvious. But the benefits of starting early often go beyond this. If you have a defined contribution pension, the money contributed will be invested. So, in theory at least, your pension pot will grow well beyond the level of your contributions. That does rely on your pension investments performing well, as this is dependent on market conditions (the value of your investments can go down as well as up). But the longer you have money invested, the better the chance that it will outride any short-term downturns in the market. Another good reason to start early.

The rules above relate mainly to defined contribution pensions, where you have a fixed pot of money when you retire (the size of which will depend on how much you’ve put in and the performance of your investments). But if you have a defined benefit workplace scheme, you’ll also benefit from paying into it for as long as possible. That’s because your eventual pension income will be calculated based on both your salary and how long you’ve paid into the scheme.

How much should I be saving for retirement at different ages?

How much you need to put away each year depends on when you start saving and how much income you want when you retire.

MoneyHelper’s pension calculator can help you work this out. It lets you enter your age, target retirement age and income, and suggests how much pension income you should be aiming for. It then asks about any existing pension pots and the contributions you’re making, plus a few other factors. Based on these factors, it tells you how close you are to meeting your target retirement income. It then has sliders that you can adjust to see how increasing or decreasing your contributions will affect your pension income.

We used MoneyHelper’s calculator to work out how much you would need to contribute each month, assuming:

  • Your salary is £30,000 and your target retirement income is £20,000
  • You want to retire at age 68
  • You will qualify for the full state pension
  • You have no existing pension savings
  • You are enrolled in a defined contribution workplace pension where you pay in 5% and your employer pays in 3% of your salary. This is your only pension other than the state pension
  • You use the money in your pot to buy an annuity that gives you a guaranteed income for life. If you access the money in your pot differently, such as through pension drawdown, your level of income may be different

What happens if I haven’t saved enough by the time I’m thinking about retiring?

If you’re approaching the age that you want to retire and realise you won’t have enough retirement savings to fund the lifestyle you want, you have a few options.

Review your existing pension scheme set-up

Check where the funds in your current pension scheme (or schemes) are invested and how they’re performing. It’s easy to just let the money in your pension be placed into the default fund. But, depending on how far you are from retirement, this may not be the right fund for you. For example, many pension schemes automatically move clients’ money into lower-risk investments as they approach anticipated retirement age. But if you’re not planning to access the money in a specific pension until well after you retire, this might not be the best option.

Check the scheme charges too, particularly if you have a personal pension. You may be able to transfer into a scheme with lower fees, often known as “pension consolidation“.

Increase your pension contributions

If there are at least a few years to go until you want to retire, this could make all the difference. Remember that you’ll benefit from tax relief on your contributions too. And if you have a workplace pension, check if your employer will match any additional contributions; some schemes do. If you can afford to lock up the money until you retire, you could also consider moving separate savings or investments into your pension to take advantage of the tax relief. You can get tax relief on contributions of up to £40,000 a year into a pension (or the equivalent of your annual earnings, if this is lower).

Postpone retirement

If you have a defined contribution pension, the money in your pension pot is a finite resource. It has to last from the day you retire until you die. So, the earlier you retire, the longer the money in your pension pot will have to stretch.

While it may not be what you’d hoped for, continuing to work for even a couple of years will give you extra time to contribute to your pension (and for the investments to grow). And it will also mean that you’ll be able to receive a higher annual income when you do start taking it.

Even if you have a defined benefit pension, which guarantees an income regardless of how long you live, some schemes may increase your monthly income if you delay when you start to receive it.

Bear in mind too that if you qualify for the state pension, you won’t start receiving it until you’re at least 66 (rising to 67 by 2028). If you can delay retirement until you reach state pension age, this will provide a welcome boost to any income from private or workplace pensions.

Continue to work part-time

If the idea of postponing retirement entirely is too much to stomach, you could think about cutting down your hours instead. These days, many people are opting for this kind of phased retirement. It could offer a better work-life balance without compromising your lifestyle.

It doesn’t even have to be in the same job. If you just need a small boost to pension income, you may be able to take the opportunity to try a lower-paid profession that you’ve always been interested in but wouldn’t have paid enough to be your sole source of income.

What’s the best way to save for my retirement?

Most people save for their retirement by paying into a pension. That’s partly because if you work for an employer, you’ll be automatically enrolled into your workplace pension soon after you start working.

But even if this didn’t happen automatically, there are at least 2 key arguments in favour of a pension as the best way to save for retirement.

  1. Whether you pay into a workplace or a personal pension, your contributions benefit from tax relief. That effectively means that, provided you’re a UK taxpayer, the government adds 20% (basic rate) tax relief to your pension pot. If you’re a higher-rate taxpayer, you can claim back the extra through your tax return (if you complete one) or directly from Her Majesty’s Revenue and Customs (HMRC).
  2. If you pay into a workplace pension, your employer has to make contributions to your pension too. Under pension auto enrolment rules, this usually breaks down into you paying 5% of your salary and your employer paying 3%. Some schemes may be even more generous.

These benefits are hard to ignore. They’re essentially “free” money. You won’t get them with any other way of saving for retirement, such as opening a general investment account or putting money into cash savings. So other retirement saving options are only likely to be worth exploring if you want to pay more into your pension than the annual or lifetime allowance, or if it’s essential that you have access to your savings before you retire. Money held in a pension can’t be accessed without paying harsh tax penalties until you reach age 55 (rising to 57 from 2028).

What are the best pension funds to invest in?

Zoe Stabler

Finder expert Zoe Stabler answers

There’s no right or wrong answer to this. It all depends on your personal circumstances and preferences. Most defined contribution pension schemes offer a range of assets that your money will be invested in. This could include a single fund, a range of funds or other types of investment such as shares or bonds. Unless you have a self-invested personal pension, which often gives you direct control over the investments you hold, the specific investments will usually be chosen by the pension provider. You just choose the broad type of investment you want – ethical funds, for example.

Many pension providers will, by default, invest your pension in a portfolio that reduces the risk level of the assets you hold as you get closer to retirement. This might be called a “lifestyle” or “target date” portfolio. That’s because, while you’re younger, you can afford to take more risks as there will be more time for your pension to ride out any market volatility. As you get closer to retiring, moving to lower-risk options reduces the chance that a sudden downturn could wipe out a chunk of your pot without it having time to recover.

This approach will suit many people but it’s always worth reviewing your pension investments periodically to make sure that they are in line with your plans. If you want to go down an atypical route then, unless you’re an experienced investor, it could be worth seeking advice from a regulated financial adviser.

Bottom line

Modern retirement isn’t what it used to be. Rather than going straight from full-time employment to full-time retirement, many people opt for a phased retirement that gradually reduces their working hours. But there will almost certainly come a point when you rely mainly, or entirely, on your retirement savings for income. Planning out how much income you’ll need, and how much you need to save to get there, is key to living your best life in retirement.

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