How much money do I need to save to retire?

Worried about how much you’ll have in your pension pot by the time you retire? Don’t worry, we all are. Pensions can be complicated, especially trying to work out how much you actually need to retire, but we’re here to help.

Here’s everything you need to know about how much to save for retirement. We’ll also cover the best way to boost your pension savings too.

As a quick spoiler, the best way to save more for your retirement is with a personal pension – you’ll get a massive 25% bonus on all of your contributions. If you’re not sure where to get started, here’s the best personal pensions (PensionBee¹ comes out top, highly recommended and is 5* rated).

How much do I need to retire?

First, you’ll need to work out how much retirement income you realistically want and need to live on. Luckily, the hard work has already been done, and the nice guys at the Pensions and Lifetime Savings Association have put together the Retirement Living Standards. We’ve summarised this all below.

There’s 3 categories of retirement income that act as a great measure for how much you’ll need in retirement and how much you need to save to retire. There’s 3 categories – minimum, moderate and comfortable:

• Minimum: this is the very minimum you’ll likely need for the essentials in retirement. So it covers things like food (£50 per week), and clothes (£630 per year). There’s not much room in the budget for anything else.
• Moderate: this is an increase in budget for your essentials with £55 per week for food and £1,500 per year for clothes. There’s also a bit extra for things like a cheap holiday every year.
• Comfortable: this is a bigger increase in the essentials with £70 per week for food and £1,500 per year for clothes. And, a bit more for extras like a longer holiday. 

Here’s how much you’ll need per year for each retirement standard:

UK (Excluding London)

London

Is it more or less what you were expecting?

The important thing to point out here is that these figures don’t include any housing costs, so no rent or mortgage payments – it’s assumed that you have a mortgage and it’s been paid off by the time you retire. If you think you’ll have to pay rent or any mortgage payments, you’ll need to add these on top.

You’ll also need to add anything else that you might want to do, such as hobbies like golfing, or treating the grandkids to expensive presents, things like that.

The minimum annual income should be the absolute minimum you aim for. To put it in perspective, it’s nearly half as much as the current minimum wage. You’ll likely struggle with just this. We recommend aiming for as much as you possibly can, at least moderate and ideally towards comfortable.

So how much will you need in your pension to retire on the yearly income you want?..

Total pension pot you’ll need to retire

So, how does that retirement income work out to a pension pot figure? The good thing is that the State Pension can boost your income significantly. We’ll cover the State Pension a bit more below, but just in case you’re not sure, it’s the pension you might get from the government when you reach State Pension age (currently 66).

Total pension pot (if also receiving the State Pension)

Total pension pot (if not receiving the State Pension)

That might seem like an impossible amount to save, but don't worry, we'll run through how to grow your pension pot shortly – you’ll be surprised by how big it can grow over time.

If you’re not quite sure what these numbers mean, here’s a quick explanation. To earn the minimum annual income of £14,400, you’ll need to save £130,399 into a private pension if you also receive the State Pension. We’ll cover what a private pension is below.

If you don’t intend to receive the State Pension, you’ll need a total private pension pot of £366,374 to get the minimum pension income level of £14,400.

Make sense? You can learn more about this with our guide to how much you need in your pension pot.

How much should you save in your pension?

So, how much do you actually need to pay into your pension each month to build up a pension pot to these levels?

We’ve worked it out for you, and broken down each retirement standard by age group – 25, 40, 50 and 60 years old.

We’re going to base your monthly repayments on the average pension pot for your age, so let’s quickly run through the average pension pot in the UK, and then after, how much you’ll need to save per month for the pension income you’d like.

The figures also include receiving the full State Pension when you retire.

Average pension pot

Here’s the average pension pot in the UK – but don’t use this as a guide, it’s actually less than you need (most people aren’t saving enough for retirement).

We’re using it as the base to estimate how much you might have in your pension pot now, in order to work out how much you should be paying in per month.

How much you need to save per month for retirement

Minimum retirement standard

£130,399 in your pension pot for an income of £14,400 per year in retirement.

Moderate retirement standard

£557,413 in your pension pot for an income of £31,300 per year in retirement.

Comfortable retirement standard

£853,039 in your pension pot for an income of £43,100 per year in retirement.

Confused? We hope it’s not too complicated, but let’s explain a bit more.

If you’re 25 and don’t have a pension pot currently, you’ll need to save £190 per month into your pension in order to build up a pension pot of £130,399 in total, which, along with the State Pension, will provide the minimum retirement income of £14,400.

If you do have a pension pot near the average for a 25 year old (£2,700), you’ll only need to save £160 per month into your pension pot.

What you’ll see is already having a pension pot, even a small one, can have a big impact on how much you’ll need to save each month – although it’s difficult, it’s a great idea to save as much as you reasonably can now, rather than put it off to later down the line!

The best way to start saving is with a personal pension with a great provider, and we’ll cover what these are below. But, if you’re in a hurry, and not sure where to get started, here’s the best personal pensions. 

As a spoiler, PensionBee¹ comes out top, it’s 5* rated, has low fees and a great track record of growing pensions over time. Here’s our PensionBee review to learn more. And so is Moneyfarm¹, plus they also have expert advisors – here’s our Moneyfarm review to learn more.

Types of pensions

We’ve mentioned the State Pension and a private pension a few times, but if you’re not quite sure what they are, here’s an overview of both.

The State Pension

The State Pension is the government pension. You’ll get this if you make enough National Insurance contributions over your working career – at least 10 years worth, but 35 years to get the full amount.

Currently, the full amount is £203.85 per week, which is £10,600.20 per year. It’s not a lot, which is why a private pension is highly recommended.

You’ll get the State Pension when you reach the official retirement age (State Pension age), which is currently 66, but rising to 67 in 2028 and in around 2039, it will be 68. Although you can continue to work and defer your State Pension, which will increase your weekly pension payments when you do decide to retire.

Private pensions

Let’s run through private pensions too – they’re pretty essential to building up a good pension pot and retirement income. The confusing thing is there’s a couple of types – a workplace pension and a personal pension.

Workplace pension

If you’re employed, you’ll likely have a workplace pension. It’s a pension that your employer will set up for you. The great thing about these is your employer has to contribute to your pension too (by law!).

If you contribute at least 5% per year of your salary, your employer must contribute at least 3%. It’s like a pay rise.

Plus, saving into them are completely tax-free – your contributions are taken out of your salary before you have to pay tax, which can make a real difference to your total pension pot over time.

The only downside, is your employer chooses which pension company (provider) to use – and often, they just pick any old one to tick the box, rather than research the best one for their employees. This is where personal pensions come in.

Personal pension

A personal pension is one that you set up yourself (don’t worry it’s easy), and you decide how much you want to pay into it, and when to start withdrawing from it.

They’re a great addition to a workplace pension and can help build up a nice big pension pot.

If you’re self-employed, they’re your only option (but a great option). Check out our guide to self-employed pensions and contractor pensions to learn even more.

They’re also tax-free (you get tax-relief), except they work a bit differently to workplace pensions. As you’ll already have paid tax on your money, when you pay into a personal pension, you’ll actually be refunded the tax you’ve paid as a bonus straight into your account – and it’s a big bonus, 25% on your contributions!

If you’re a higher rate taxpayer (40%), or additional rate taxpayer (45%), you’ll also be able to claim tax back that you’ve paid at those rates too (done on your Self Assessment tax return). The extra bonus can go a long way in helping you reach those high targets.

The best thing about personal pensions is that you get to pick which provider to use. That means you can pick a provider that’s easy to use, has low fees and a great track record of growing pensions over time.

If that sounds good to you, check out PensionBee¹ – they’re all of the above and 5* rated. Another great option is Penfold¹ (here’s our Penfold review), or compare all the best pension providers.

How to grow your pension

As you've seen, those pension pots need to be pretty big. But as we've said, don't panic just yet. Building up a nice big pension pot can be easier than you think over time. Here’s how.

Pension pots grow big by something called compound interest – that’s where the money your pension makes, makes money itself too, and this snowballs (compounds) over and over, and can turn small amounts into huge figures.

Let’s look at an example. Let’s say you have £500 in your pension, in a year, it has increased by 10% to £550, and you’ve made £50. In the following year, it also increased by 10%, but now your total balance has increased by £55, as you’re making 10% on £550, not £500. The following year it will increase by £60.50. This carries on over and over – and after a long period of time it can have a massive impact.

Let’s try a real world example. Say you are earning the average annual salary in the UK of £33,000, and have already saved a pension worth £10,000. If you have a workplace pension, you’ll be paying in 5% of your salary yourself, and your employer will be paying in 3%, so your pension contributions will be 8% per year, which is £220.

If your pension balance grows each year by 7%, after 25 years you would have a total pension pot of £235,470. Not bad right? And if you continue for another 10 years, you’ll have saved £511,294.

When your pension pot is this size, just one more year saving, you’d make £35,791 in one year – that’s more than your annual salary!

Can you now see how those large pension pots can be achieved? It’s easier than it seems, it just takes time. Although using the right pension and picking a great pension provider can make a real difference. We recommend using one of the best pension providers.

Note: your pension grows as your money is pooled together with lots of other people's money into what’s called a pension fund. And experts manage this pension fund to grow it in a safe and sensible way over time. However in the short-term the value of your pension can go down, but don't panic, pensions are for the long term.

Best way to save within a pension

There’s 2 options to boost your pension pot, the first is to save more within a workplace pension (if you’re employed), and the second is to open a personal pension for yourself.

Saving more into a workplace pension than the minimum is only beneficial if your employer contributes more than 3% if you contribute more yourself (more than 5%). For instance, they could match your contributions if you paid in say 10%.

Nuts About Money tip: if they offer this, definitely take them up on their offer! You’ll be earning a lot of free money over the years – it’s just as good as a payrise, maybe even better as it's tax-free!

However, often workplace pensions aren’t the best pension providers. Plus, you can’t transfer your current workplace pension while you’re still working there (transferring your pension is where you move it from one provider to another – you’d often do this to move to a better provider, for instance when you leave a company).

Enter the personal pension! You’ll still be able to save tax-free, as you’ll get a 25% bonus on your contributions. Plus, with a personal pension, you get to pick which provider to use, so you can pick one that’s easy to use, has low fees and a great track record of growing pensions over time. And you can transfer them to a new provider whenever you like!

If you’re not sure how to go about finding these amazing pension providers, we’ve reviewed the best personal pensions, and the top are below:

Best personal pensions

Consolidating pensions

We’ve mentioned transferring your pensions to another better provider, and what this means is that you can consolidate all of your old pensions (if you have them) into your new pension. This simply means combining all your pensions together.

Why consolidate pensions? Good question. There’s a lot of benefits:

1. Never forget where your pensions are. You’ll be able to keep track of your pension, how it’s performing and where it’s invested much easier (for instance in socially responsible investments). Plus, as there's only one, you never have to worry about forgetting about them – it’s unlikely your pension providers will get in touch with you later down the line, they’d rather you forget about it so they can keep earning money from you (in fees).
2. Potentially benefit from lower fees. Some pension providers will reduce their fees (which can be low already) if you have more saved with them. And this can have a big impact on your total pension pot when the time comes to retire.
3. Potentially benefit from higher growth. Again with the better pension providers, they tend to have better records of growing pensions over the years too – and again this can have a huge impact on your total pension pot.

These are great benefits, and can really make a huge difference to your final pension pot – it’s worth keeping on top of where your pension is!

It’s super easy to consolidate your pensions too. All you need to do is let your new pension provider (such as the ones above) know where your old pensions are, and they’ll handle all the paperwork and transfer them across for you. It really is that easy!

Pension limits

Before you get too carried away and put everything you have into your pension, there's a limit to be aware of.

You can’t put more than your total yearly income (e.g. salary) into your pension within a tax year (April 6th to April 5th the following year), or more than £60,000, whichever is lower. This is also called your annual allowance.

If you do want to save more, you could also save within a Stocks and Shares ISA. This is another tax-free savings account where you can invest up to £20,000 each year.

What happens when you retire

Once you’ve built up a nice big pension pot, hit your retirement savings goals, and are all ready to retire, what actually happens?

After you’ve turned 55 (57 from 2028), you can start withdrawing cash from your private pension (workplace and personal pensions) if you want to, although we recommend keeping it where it is for as long as possible, so it grows much bigger!

The first 25% of your pension will be tax-free, and you can take this as a tax-free lump sum if you want to. Otherwise, the first 25% of each withdrawal will be tax-free.

The remaining 75% will be liable for Income Tax, which is the same tax as your salary, and how much you’ll actually pay will depend on how much income you have at the time. You’ll still get a Personal Allowance of £12,570, before you’ll have to pay any tax.

When taking your pension, you’ve got 2 options, you can either use your pension pot to buy an annuity, which is a guaranteed income each month for the rest of your life (or a set number of years). Or, you could simply leave your pension pot where it is, and withdraw cash as and when you need it (such as every month), which is called income drawdown.

Your pension provider will help you later down the line, but you could also get advice from an independent financial advisor. You can find great financial advisors with Unbiased¹.

If you’re eligible for the State Pension, you’ll also get this from age 66 (rising to 67 in 2028).

Lets recap

We hope that’s made saving for a pension a bit less daunting! How much money you need to retire is some seriously big numbers, as much as £853,039 in your private pension (and also get the State Pension), to earn a comfortable retirement lifestyle with an income of £43,100 per year.

But don’t panic, you really can build a big pension pot over time – the longer you save the bigger it will get, and grow much bigger in later years. The key is to make regular contributions to your pension – and every little bit really does help!

How much you’ll need to save each month will depend on how much retirement income you think you’d need, but ultimately, save as much as you reasonably can to give yourself the best income possible.

And the best way to save for retirement is through a personal pension, in addition to a workplace pension (if you’re employed) – you’ll automatically get a massive 25% government bonus on everything you pay in, and can pick a great pension provider, one that’s easy to use, has low fees, and a great track record of growing pensions over time.

If you’re not sure where to find these amazing pension providers, here’s the best personal pensions. To recap the top is PensionBee¹ – they’re all of the above and highly recommended. You could also check out Moneyfarm¹, they also provide expert advice.

And that’s all there is to it. Happy saving!