Important information - The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
There are lots of different ways to think about your retirement savings targets.
You might find it most useful to think in terms of the annual income you need your pension pot to provide. You think you’ll need £20,000 a year from pension, say.
Or you may prefer to think in terms of the savings you need in order to replicate your pre-retirement income, or a percentage of it. How much do you need to create a pension income worth 60% of your pre-retirement salary, for example?
But perhaps the easiest target you can draw up is a simple cash total that you would like to have saved in a pension when you retire. That figure won’t tell you exactly what income you’ll have, but it does give you a running total that you can refer to as you move through your career. You can easily check to see how you’re doing against the target by checking the balance in your pensions as the years go by.
A lucky few might be able to target amounts of £1 million or more in their pension, but for most that kind of figure is unachievable. A target of £500,000 is a more realistic ambition for many more of us. That kind of figure is still much larger than the average pension pot, but targets are supposed to be challenging. Even if you can’t reach that kind of level, having such a target and working towards it is likely to encourage you to save.
So, what does it take to save £500,000 in your pension?
Doing the sums - with a little help
Fidelity’s MyPlan tool is an online calculator which allows you to enter details like your age, earnings and level of savings to work out the kind of pension pot you might be able to expect in the future. The figures we highlight below have been generated using aspects of the MyPlan tool.
It shows us that someone aged 25, retiring at their current scheduled retirement age of 68, would need to save £500 a month throughout their career to have a 50/50 chance of having £509,000 saved in a pension when they retire.1
There are important caveats to that figure. This assumes that their money can be invested and generate a return equal to the average market performance, based on history. In other words, this person would have a 50% chance their pot will exceed that level, and 50% chance it will miss it. The figure also assumes that they are happy to invest and take a moderate level of risk with their pension money - meaning a split of 75% shares and 25% bonds.
The effects of delaying your saving
Part of the reason that a person might be able to eventually save such a large amount is that they have many years to contribute to a pension, and many years for those contributions to potentially grow with compounded investment returns. Someone aged 25 and retiring at 68 has 43 years in which to save.
If they have fewer years until retirement, the sums they have to put aside jump higher. For example, if someone began their pension saving at age 35, rather than 25, they would need to set aside £750 each month to reach a target of £500,000 - based on the same assumptions as above.2
If they delayed until age 40 they would need to set aside £950 each month to reach £496,000 by age 68.3
Why contributions may not require the sacrifice you think
The monthly contributions in these examples represent the sums which need to go into a pension each month, but the cost to your take-home pay is likely to be lower.
Contributions into a pension benefit from tax relief, and this has the effect of making them less expensive than you might think.
For example, a £1 contribution today costs you 80p if you’re a basic-rate taxpayer, as little as 60p if you’re a higher-rate taxpayer and 55p if you pay additional-rate tax. Rates of tax relief for Scottish Residents may differ to the rest of the UK. The relief for higher rate and additional rate tax often has to be claimed for via a self-assessment tax return - in which case you would get the benefit through an adjusted tax bill the following year. The exception to this is some workplace schemes where the relief for higher and additional rate relief is automatic.
If the target seems impossible - don’t despair
Targets like this are supposed to challenge you. Their greatest use is as a prompt to get you engaged in your pension saving and planning. You may only be able to put aside smaller amounts each month than we have talked about here, but at least you’ll then have a base to build from.
Saving is habit forming and your progress can be gradual. But once you’ve set a target like this, you’ll be much more likely to increase you pension saving over time - whether you hit your eventual target or not.
Consider consolidating your pensions
The great benefit of consolidating pensions is that they become far easier to look after because everything is in one place.
Bringing your pensions together in a Fidelity Self-Invested Personal Pension (SIPP) means that not only will you be able to more easily see how much you have, where your money’s invested and how it’s performing, but it could be potentially cheaper if the service fees of your new provider are less than you’re currently paying.
Knowing with certainty the size of your pot means you can react if you feel you are under-saving to achieve your retirement savings goal.
1,2,3 Fidelity MyPlan tool December 2020, projected savings in current money terms.
Important Information: Withdrawals from a pension product will not normally be possible until you reach age 55. Tax treatment depends on individual circumstances and all tax rules may change in future. This information is not a personal recommendation for any particular investment. It’s important to understand that pension transfers are a complex area and may not be suitable for everyone. Before going ahead with a pension transfer, we strongly recommend that you undertake a full comparison of the benefits, charges and features offered. To find out what else you should consider before transferring, please read our transfer factsheet. If you are in any doubt whether or not a pension transfer is suitable for your circumstances, we strongly recommend that you seek advice from an authorised financial adviser.
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