How much is enough in retirement?

Guidance is good but at the end of the day, it’s personal.

Which?, the consumer group, has estimated the amount ofincome, including state pension, that people are likely to need in retirement, as follows:

Single-person household

‘Luxury’ retirement - £31,000 (pot size of £671,000 needed for annuity; £422,140 for drawdown)

‘Comfortable’ retirement - £19,000 (pot size of £305,170 needed for annuity; £192,290 for drawdown)

‘Essential’ retirement - £13,000 (pot size of £123,365 needed for annuity; £77,350 for drawdown)

Two-person household

‘Luxury’ retirement - £41,000 (pot size of £757,000 for annuity; £442,020 for drawdown)

‘Comfortable’ retirement - £26,000 (pot size of £265,420 for annuity; £154,700 for drawdown)

‘Essential’ retirement - £18,000 (pot size of £47,325 for annuity; £28,810 for drawdown)

These estimates are net of tax and based on someone retiring at 65 and withdrawing all their income through drawdown over 20 years.

• Learn more: SIPPs Explained | SIPP Calculator | SIPP Drawdown

Commenting on the estimates, Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “These estimates are a useful guide for people to know the retirement that they are roughly on track for, given their current pension pot size. But the amount we should all aim for is very personal and at the end of the day, depends on circumstances and goals, such as whether you want to leave an inheritance.

“It’s important to think about the lifestyle you have now and how much you would like this to continue when you retire. If your income will be substantially lower, then unless your costs fall dramatically too, you will have to get used to a potential drop in living standards when you stop work.

“Living costs do tend to fall for retired people and these estimates also assume major expenses such as housing costs are largely paid off. But bear in mind any costs you expect to continue into retirement that could eat away at your pot faster, such as housing costs, as well as whether you will need to continue to support adult children or leave them an inheritance, should be factored into your own personal calculation for what your retirement pot should be.

“The Which? drawdown estimates reduce the pot size to nothing after 20 years, which means if you lived to be older than 85, in these scenarios, you would become dependent on the state pension at that point.

“While the estimates suggest that someone on an average salary paying the auto-enrolment minimum of 8% throughout their working life who will also receive the state pension should just about be on track for a retirement somewhere between ‘essential’ and ‘comfortable’, it might still be a struggle to manage any unexpected high bills, such as property maintenance.

“Self-employed people will need to put more in themselves to achieve the same outcome, as they do not benefit from employer contributions.

“It’s also worth bearing in mind that if you are in a defined contribution scheme, as most now are, your pot size is subject to variations in stock market performance. Those who retire during a downturn can find a substantial chunk of the pot they were expecting wiped out at the last minute and sometimes have to work longer to make up for it.

“According to the interactive investor Great British Retirement Survey 2020, one in four people had suffered life setbacks that had derailed their retirement plans, such as illness or divorce, with women and people with children the most likely to be affected by an unexpected event. While no one knows what the future holds, it’s sensible to factor in the odd setback is likely.

“Younger workers who want to boost their chances of retiring well could do themselves a big favour by investing in potentially higher growth assets earlier on as this will give them the best chance of higher returns over the years. A separate study by interactive investor, Show Me My Money, found that more than a fifth of 18- to 34-year olds have a low-risk pension, and so are potentially missing out on higher returns.

“Increasing contributions above the auto-enrolment minimum will also put you in a better position later on. The auto-enrolment minimum of 8% is not guidance on the right amount – it’s the minimum and should arguably be at least 12% to account for the possibility of lower investment growth over the coming decades, as highlighted by the interactive investor and LCP report ‘Is 12% the new 8%?’, published last month. Don’t forget contributions to workplace schemes include employer contributions and tax relief. Generous employer contributions can be a huge boost to your retirement outcome – something to bear in mind if looking for a new job.

“To know you can get by on less when you retire is comforting, but if you are able to build up a bigger pot so that you can have more options later in life, then it’s a good idea to do so.”

Interactive investor has a calculator for people to work out how much they need to invest in their pension for the retirement they want at: https://www.ii.co.uk/ii-accounts/sipp/pension-calculator.

Notes to editors

• Which? findings can be found here.
• Is 12% the new 8%?
• Great British Retirement Survey 2020
• Show Me My Money