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How do your retirement savings compare to the state pension?

We often read that the reality of our retirement income fails to meet our expectations and that we, as a population, consistently overestimate the amount of income that we will have to live on after we finish working.

This article aims to help you put retirement income into perspective by comparing the amount you would need to save in a private pension to at least equal the income derived from the state pension.

The current full state pension amounts to £8,767 a year. To derive an income that amounts to this, or more, from a private pension, we can look at two different pension income options, to provide you examples of how much you would need to have saved by the time you finish work.

Firstly, if we look at the income provided by an annuity, the product that takes pension savings and converts the savings into a guaranteed income for life. Based on current annuity rates, a 68-year-old man buying an income that rises with inflation would require pension savings of about £266,000 to provide an annual income of £8,767 per annum, the equivalent income from the full state pension.

If we then look at how much you would need to save if you were to choose income drawdown to provide a flexible income from your pension savings.

Income drawdown allows you to leave your money in your pension pot and take income or lump sums from it, as and when you want. Any money left in your pension pot remains invested and continues to have the potential to grow. How much you can withdraw sustainably in income drawdown depends on a range of factors, including investing returns. But for the purpose of this example, based on Fidelity’s  retirement savings guidelines1, savings of about £179,000 could be required to recreate an equivalent state pension income2.

This is potentially less savings required than through an annuity, but it does rely on how your investments perform over time and comes without the guarantee that the income will last until you die. It also requires you to carefully monitor and manage your investment.

Both examples are significant sums of money and it’s clear to see why people underestimate the challenge of securing an income from a private pension. However, with knowledge and understanding, you can begin to feel more confident about planning your savings and future income in line with your expectations.

Our retirement planning calculators can help you look more closely at various aspects of your retirement, from planning your goals and savings to working out your withdrawals.

You can use our retirement calculator to get a quick indication of the annual income you may need in retirement to have the lifestyle you want, and myPlan will show you whether you’re on the right track to saving enough to achieve your goals.

The Government also offers a free and impartial guidance service to help you understand your options at retirement. This is available via the web, telephone or face-to-face through government approved organisations, such as The Pensions Advisory Service and the Citizens Advice Bureau. You can find out more by going to pensionwise.gov.uk or by calling Pension Wise on 0800 138 3944.

Generally, the earlier you start investing and the longer the time frame, the more potential you have for your money to grow because of the power of compounding, which is when you earn interest on top of interest, making your savings grow even faster. However, it’s never too late to increase your contributions, and small changes today can make a big difference over time. 

For example, a 30-year old today earning £30,000 could contribute an extra 1% of their salary and then retire at 68 with an extra £58,273 in their retirement fund. And the contribution required now would be less than £6 a week - although tax relief on pension contributions means the actual cost is even less than that.

If you’ve built up several pension pots over your working life and are finding it difficult to keep on track of your retirement savings, you may want to consider transferring your pensions into a Self-Invested Personal Pension (SIPP). Pooling your pensions together means you’ll be able to more easily see and manage your retirement savings all in one place, enabling you to take more control of your investments and plan ahead more effectively.

1 Source: Fidelity International’s retirement savings guidelines white paper, November 2018.
2 Estimate based on average household incomes that does not take into account personal circumstances. Illustration of a male, with a retirement age of 68, with household savings of £179,000, withdrawing between 4% to 5% of household retirement savings in the first year of retirement with adjustments for inflation, over a 24-year period.

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. You cannot normally access your pension savings before age 55. Tax treatment depends on individual circumstances and all tax rules may change in the future. 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.

Pensions all over the place? Sounds exhausting

Make life easier and be better prepared for the future by bringing your pensions together. Plus get £20 to £1,000 cashback (exclusions, T&Cs apply)