How much to save for retirement if you’re starting from scratch

Many of us will, at some point or another, be confronted with the question: “How much do I need to save for a comfortable retirement?”

The answer, for those who want a rough idea, depends on several factors. These include how much you’ve tucked away already, how your investments perform, the lifestyle you aspire to in later life, and your savings time frame.

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The latter two points – retirement lifestyle and current age – is what we’ll focus on here.

To give us something to work with, the Pensions and Lifetime Savings Association (PLSA), a trade body, every year calculates the level of income you might need to achieve a minimum, moderate or comfortable retirement. The PLSA translates this income into target pot sizes.

So, how much would you need to shovel away every month based on your age, assuming you start from scratch?

First, the impact of inflation…

To gain an accurate picture of the task facing savers of different age groups, we must factor in future price rises.

Inflation eats into the buying power of our money over time. For example, you could buy a Mars bar for 25p in 1994, but today the snack costs around 85p.

As such, I’ve baked 2% annual inflation into the calculations, which means the younger you are, the bigger pot you need to aim for to fund the equivalent lifestyle. 

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I’ve also assumed you qualify for the full state pension (£11,502 for the 2024-25 tax year) and used the age at which you can expect to receive it based on the current timetable. The state pension age (SPA) is currently 66 but rising to 67 in 2028, and to 68 between 2044 and 2046. To note, the figures are based on a single person; couples will almost certainly need to save more.

A couple of final things before we look at the numbers: I've calculated future investment growth at 5% annually after charges, and contributions tick up by 2% a year. 

What level of comfort do you strive for?

• Minimum retirement
  Pot size required if retiring today - £41,963

To have enough just to make ends meet in later life, you will need a pre-tax income of £14,857 a year. If you were to retire today, provided you qualify for the full state pension, you would need just shy of £42,000 in savings. This would cover your everyday needs and leave a bit leftover for some fun – but not much. Owning a car is likely out of the question.

• Moderate retirement
  Pot size required if retiring today - £306,025

To achieve a moderate lifestyle, which will provide more security and flexibility such as a foreign holiday every year and running a car, you need an annual pre-tax income of around £35,982, according to the PLSA’s research. If you start saving at age 30, you will need to save £366 a month to accrue the required pot. In contrast, delay until age 50 and the monthly payment vaults to £1,167.

• Comfortable retirement
  Pot size required if retiring today - £492,338

This is what most will aspire to: being afforded greater financial freedom and some luxuries such as eating out regularly, treating grandchildren and several annual holidays. To achieve this, you will need pre-tax income of £50,887, according to the PLSA. As the figures show, you’ll have to save pretty hard to get there, no matter your age.

Assumptions: 2% inflation, data for pot size needed from PLSA Retirement Living Standards – based on lowest value within PLSA range (£8,000 per £100,000 annuity rate), no existing savings in place, full state pension received.

Start as soon as you can

There is a crucial aspect that is evident throughout the tables: the cost of delay.

It may come as little shock to learn that the later you start saving, the more you need to squirrel away every month. But the size of the difference may surprise you.

This is for two reasons. First, starting younger gives you more time to make pension contributions. Second, you gain a greater benefit from the superpower that is compound returns. This is where you earn interest on your interest (or growth on your growth), creating a snowball effect that gets bigger over time.

I’ve also split the required contributions into two columns: gross and net. The latter takes account of the basic-rate tax relief (20%) you get when you pay into a pension. You don’t have to use pensions when saving for your retirement, but this helps to illustrate why they’re so popular. I dive deeper into upfront pension tax relief in the next section.

Let’s talk about employer contributions and tax relief

To give yourself the best chance of reaching retirement with adequate savings, it’s vital to engage with your pension at the earliest possible stage and set clear and defined later-life goals.

Of equal importance is to make the most of any workplace pension contributions (if you’re employed) and upfront tax relief. This cannot be overstated. It means that your workplace and the government take on a significant amount of the legwork.

• Employer contributions

A comforting reality is that few people will reach middle age with a barren retirement pot. So, the amount you need to contribute should be less than the figures laid out above. If you haven’t done already, it’s worth rounding up any existing pensions – and merging them together where suitable - to see where you stand.

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Since auto enrolment was introduced in 2012, you automatically join a pension scheme when you start with a new employer. Under current rules, if you pay in 5% of salary, your employer must contribute at least 3%. Some workplaces are more generous and will offer to pay above the minimum - although you might have to match their contribution.

It’s worth checking with your employer as soon as you can to find how much they’re prepared to pay in. Your future self will thank you.

But while making the most of your workplace scheme is paramount, it’s wise to avoid sleepwalking into retirement assuming that it alone will do the job.  

• Upfront tax relief

The upfront tax relief on offer is one of the main attractions with pensions. As noted above, basic-rate taxpayers get an immediate 25% boost in the form of a government top-up. This means a £400 contribution will be boosted to £500.

And the tax perks are even greater if you pay 40% or 45% tax. In short, if you’re a higher-rate taxpayer, a £500 pension contribution will ultimately cost you just £300 – a huge leg-up towards your retirement goals.

If your employer offers salary sacrifice, where you trade a portion of earnings for a pension payment, strongly consider taking them up on it. That’s because you’ll also save national insurance (NI) too, which could be as much as 8%.

When it comes to making personal payments, such as to a self-invested personal pension (SIPP), you’ll get basic-rate tax relief upfront and can claim back any extra if you pay either 40% or 45% tax, through your tax return.

Younger savers need to strike the right balance

It’s all well and good being urged to pump as much as you can into your pension when you’re young, but retirement isn’t your only financial priority. For this reason, it may fall down the pecking order behind things like buying a first home, and naturally so.

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Still, it’s crucial that you kickstart the savings process as soon as possible to reap the greatest rewards from compound growth and capitalise on employer contributions. A bit of careful planning and goal setting can ensure both your pre- and post-retirement goals are taken care of.

Making up for lost time

If you’re edging closer to the point you plan to pack up work and need to make up for lost time, the good news is that annual pension allowances are generous.

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Most people can contribute the lower of £60,000 or 100% of earnings every year into a pension and get tax relief at their marginal rate. You can also carry forward unused allowances from the previous three years (although the 100% earnings rule still applies), which can be useful for those looking to make particularly large pension contributions.

Horses for courses

One important thing to stress is that while the PLSA figures can act as a useful gauge and starting point, each of us will have our own idea about what a moderate or comfortable retirement means for us. Later-life planning is very much a personal affair; one person’s comfort is another’s luxury. The key is to think about how you would like to spend your time in retirement, work out how much you’ll need to fund these activities, and start saving as soon as you can.