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Retirement planning in the UK. How Much Money Do You Need To Retire?

Pensions / At Retirement Planning

This blog will explain how you can calculate and determine your retirement savings. It is written as a guideline to help you with your retirement planning. We also explain workplace pensions which should be incorporated into your retirement plan. The guideline is to ensure that you have enough money saved up and can live comfortably during your retirement.

It is essential to understand when you can afford to retire rather than when you want to retire. It is crucial to ensure that you have enough money in your pension pots for a comfortable retirement. Skipping this step shouldn’t be an option, as what you want to avoid is running out of money.

How much do you need? 

According to pension and lifetime savings associations, the research shows that 51% of people focus on their current needs and wants at the expense of providing for the future, and only 23% of people are confident they know how much they need to save.

Until recently, It was often said that people needed to save up to about two hundred and fifty thousand pounds for a comfortable retirement. It is estimated that to have a very comfortable retirement, we might need to save five hundred thousand pounds and even a million pounds.

Seeing those figures can be worrying, and it might even cause some to wonder how they can save that much money. 

To better plan for your retirement, it is best to ask yourselves these three questions. 

  1. How much do you need to live comfortably?
  2. When will you need that money?
  3. How will you get there?

Focusing on these three key questions rather than just the figures will help you make better retirement planning financial decisions. 

What age should you start thinking about your retirement plan?

We often hear people talk about their retirement plan when they’re getting closer to their 50s or older. But should we be planning for our retirement at an earlier age? The answer is yes. The sooner you start your retirement planning, the easier it is to reach your retirement financial goals.

What does your retirement consist of financially?

Your retirement money does not rely on a single source of income. It includes :

  1. Your pension
  2. Social security benefits
  3. An inheritance
  4. Or income-generating investments

Over your lifetime of working, you will accumulate different types of pensions. Keep on reading to learn how it adds up over the years. Understanding how your pension works and the different kinds of pensions will help you make better decisions. The aim is to ensure you can figure out how to get your golden financial figure.

The golden rule of thumb is that you need about a half and two-thirds of your final salary after tax when you come to retirement age. The figure you get will be the amount you need to save in your pension fund.

It is important to note that you might not need that much, so it is essential to start thinking about what kind of lifestyle you are aiming for and what annual income you need to generate from your pension.

It all comes down to your lifestyle, current expenses, and what you want to do when you retire. Then create a budget which aligns with your retirement planning goals. 

It is paramount to factor in significant inflation as it can change the cost of your retirement goals.

Write down and understand your spending.

  1. Mortgage

In most cases, most of us would have had time to pay off our mortgages by the time we reach retirement age. This is good, and you should note it when planning your retirement.

  1. Renting

If you’re still renting, you need to factor in that you ( unless under circumstances of inheriting a home and you do not need to pay the mortgage ) will have ongoing rental charges to pay throughout your life. 

  1. Write down 
  •  All of your essential monthly expenses, such as your utility bills. 
  • All insurance, for example, if you have a car along with its annual maintenance costs.
  • Your monthly grocery bills.
  • Your non-essentials. For instance, if you have a specific hobby that you wish to continue doing during retirement.  This also includes types of holidays.

All of the above must be factored in. It will help give you a better perception of your monthly spending and how will that look like monthly during your retirement. Planning your retirement early will provide you with a  stress-free and comfortable lifestyle. 

After noting down your monthly expenses, multiply that figure by 12. The answer will give you the annual income you will need to save for your retirement funds.

Determine what kind of lifestyle you want when you retire.

Having a clear understanding of what lifestyle you’re aiming for when you retire will help you make better financial decisions. 

Ask yourself. Do you want:

  • A simple lifestyle will all your basic needs
  • A comfortable lifestyle 
  • A luxurious lifestyle

Research has shown that for a simple lifestyle that does not include a car, including your free bus pass, only shopping at low-cost grocery stores and keeping your spending to a minimum, a single person would need ten thousand pounds per year, and a couple would need sixteen thousand pounds annually to maintain a basic lifestyle.

For a comfortable lifestyle, a single person will need about twenty thousand pounds per annum and a couple of twenty-seven thousand pounds per year. 

For a luxurious lifestyle, a single person will need to aim for an annual retirement income of around thirty-three thousand pounds; for a couple, they will need to save between forty-two and forty-seven thousand pounds per year. 

Henceforth for anyone aiming to have a luxurious lifestyle, you will need to save quite a lot for your retirement plan.

How to generate that income from your pension funds? 

  1. Pensions. 

You will have your:

  • State pension
  • Work pension

In addition, you might also have:

  • Isis pension
  • Property investments  or other assets                  

When you start your retirement planning, it is essential to factor in all pension income with your state pension. Also, important to note that you can only access your state pension when you are at state pension age before claiming that benefit.

The average retirement age for men in the UK is 65.1 and for women is 64. If you plan to retire before your state pension age, you must ensure that you have enough saved in your retirement funds. 

Workplace pension

A workplace pension is a pension that your employer arranges. Contributions will be taken directly from your salary and paid into your pension. Usually, your employer will also add money to your pension. 

If you have a workplace pension scheme, understand how it works and how it will help you save up for retirement. Your employer arranges the pension, and you and your employer usually have to pay into it under auto-enrolment rules.

Grasping your current financial situation and taking advantage of pension schemes can help you reach the financial retirement amount you desire. You don’t have to personally save a quarter of a million to generate a comfortable retirement as long as you have other financial schemes in place.

As we’ve mentioned previously, you’ve got:

  1. Your workplace contributions 
  2. The market returns from the workplace pension scheme 
  3. Your state pension

These will all add up and help contribute to your retirement pot.

There are two main types of pension schemes in the UK.

If you are currently doing your research online, ensure the information is about retirement planning in the UK. Different countries have different schemes. 

Defined Benefit

They are good pension plans to be part of as they guarantee an income during retirement. Part of this plan is that you receive an annual statement which gives you an estimate of what your pension fund might be. Your amount will depend on your salary and how long you’ve worked for your company.

Both you and your employer will contribute towards the pension fund. The annual statement will explain your pension value and the projected pension you might receive at retirement age.

The disadvantage of defined benefit is that it is inflexible. Once you’ve set what you’re getting, you can’t change it. Also, when you pass away, the payments stop. Usually, no money can be passed to beneficiaries such as your children.

Defined contribution

This is the most common type of pension. You might know them as SIPPs, personal, workplace, stakeholder or money purchase schemes. They are different from defined benefits as you’re the only member, and it relies on what you pay into them.

The money is then invested in the markets with the hope of growing long-term. When you reach 55 years of age, you can take a 25% tax-free lump from your pension. You can either take it all at once or in small amounts. 

For the remaining 75%, you can either choose annuity or drawdown.

You can use this information to stay on track with your savings for retirement. Most importantly, it will give you an idea of the type of retirement lifestyle you can aim for.

What is an annuity?

An annuity pension is similar to a defined benefit pension which gives you a guaranteed income. However, compared to a defined benefit pension, an annuity is customisable. This allows you to add a spouse’s pension or increase the monthly amounts in line with inflation. 


What is drawdown?

Drawdown allows you to access the money how and when you want it. You have much more control over your money, but it’s not without risks. 

Not everyone is good at managing their money. If you use that flexibility to overspend, your retirement pot will run out much quicker than you originally planned

The positive is that this type of pension gives you the option to have a death lump sum, allowing you to pass on the remaining pot to whomever you wish. 

Considering the information above, what kind of pension fund you want does make a big difference. Annuities tend to cost more, but you have a guaranteed income for the rest of your life.

Stay on track

The sooner you start accumulating wealth, the easier it is to achieve these targets. Keep track of different ways how you’re saving money. Either through investments, pension schemes, or personal savings.

There are currently different tools online that you can use to estimate your pension fund. The calculations will help you determine how much you have saved, what your monthly contributions and expenses are, how much your employer contributes, and what your projected retirement age is. The result will let you know whether you’re on the right path to meet your retirement financial goals.

Doing this every year is good practice to ensure you’re on track. The earlier you can detect something off-target, the faster you can resolve it. Understanding our financial status and the type of retirement lifestyle we can aim for or have realistically is vital. 

Summary of the above information

If you want to retire earlier than you’re allowed to claim your state pension, you must ensure you have enough money.  Also, note the other potential income sources you might receive and add to your state pension. It will add to your annual amount, contributing to a more comfortable retirement. 

If you aim for a comfortable retirement lifestyle, you need to plan out your financials and make sure you are clear about the monthly spending you wish to have when you retire. Decide whether you want to do the drawdown or by an annuity.

It is essential to calculate what you think your spending will look like. That is understanding your current expenditures, your necessary bills, and factoring in the non-essentials. It will help you figure out your likey monthly outgoings.

Take into consideration emergencies that can occur. Such as your washing machine needing replacing or the boiler needing servicing. Your retirement plan ensures you have sufficient money to cover all costs and enjoy a nice retirement.

Next steps?

At Consilium Asset Management, we help our clients through the whole process. We understand that it can be overwhelming and that there is a lot to consider. We make the process as simple as possible. 

Our team of expert pension and retirement planning professionals would work with you to help give you the lifestyle you want. The goal is to provide you with all the advice and tools you need to ensure you live the best life you want. 

Are you interested to learn more?

Get in touch with us today or call us at  01454 321511. 

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