Inflation is wreaking havoc on retirement planning – as prices rise, it’s tempting to cut your savings and pension contributions to maintain your living standards.
Indeed, a Bank of England survey in November 2022 found that higher-income households were doing exactly that, while Canada Life says over a third of over-55s will work beyond their retirement age because of the squeeze on incomes.
Then there’s the upcoming hike to corporation tax for many UK companies, which may tempt some directors to cut back on their contributions.
But we all know the importance of saving for retirement, so how much do you need to save, and what are some strategies to get there?
How much would you need if you were retiring today?
How much you should save each month depends on three main factors: the lifestyle you want, where you live and when you expect to retire.
Factoring in each one of these requires a lot of research, but let’s start by looking at what the average individual and couple would need to retire in the UK today (outside of London).
The Pensions and Lifetime Savings Association (PLSA) has a summary of retirement living standards online, examining what the average individual and couple requires for a ‘minimum’, ‘moderate’ and ‘comfortable’ retirement.
It says a couple would need £54,500 a year for a comfortable retirement, which it defines as a standard of living with “more financial freedom and some luxuries” – two cars, each replaced every five years; three weeks in Europe a year; £1,300 for clothing and for wear, and so on.
For a moderate retirement with “financial security and flexibility”, you and your partner would need £34,000 a year, while you would need £19,900 a year for a minimum standard of living.
How much would you need to retire in London? That’s harder to say, but Trust for London found in a 2019 report that London is up to 58% more expensive than the rest of the UK, thanks to housing, childcare and transport costs.
Saving enough for your retirement
You’ll know that retirement saving is easier with the state pension, which is protected by the triple lock. However, with the current new state pension providing only £10,600, you might need to focus on saving to make up the difference.
The trouble with saving is inflation; according to the PLSA, rising prices added almost 20% to the ‘minimum’ cost of retirement in 2022.
While inflation was noticeable in 2022 when it ran at over 10%, a healthy economy actually has a lower rate of inflation that is harder to spot. For context, the Bank of England aims for 2%, where prices would double every 35 years.
Therefore, it’s all well and good talking about how much you need to have to retire tomorrow, but it’s a lot harder to predict what you’ll need in the future – certainly if you haven’t reached your 50s yet. But there are ways to get ahead of the problem.
Put more away than you think you’ll need
First, and we’re aware of how obvious this sounds, you need to save a fair amount – probably more than you think. Work pension schemes are great for this because employers can contribute to them, too.
Saving more than you think you need isn’t just important because of inflation, but because of the many twists life can throw at us – what if you need special care during retirement? Have you budgeted for that?
Tax relief on pension contributions
Pension contributions also have a sort of inflation-busting mechanism built into them through tax relief — for every pound you put into your pot, the Government will top it up by a certain amount.
You get tax relief at the highest rate of income you pay. So, if you’re a basic rate payer, you’ll get 20% relief, which means that for every £1 you contribute, the Government adds 25p, because £1.25 taxed at 20% is £1.
Higher and additional rate taxpayers get tax relief at 40% (every £1 becomes £1.66) and 45% (every £1 becomes £1.82), but they need to apply for the relief via self-assessment.
You have an annual allowance of £60,000 and only get relief on the contributions that equal your relevant UK earnings in the tax year you contribute to your pension.
For every £2 you earn above £240,000, your annual allowance reduces by £1, however, so take that into account if you’re a high earner.
You can roll over any of the annual allowances that you did not use in the last three tax years. Have you checked to see whether you have any leftover allowance? If so, you may be able to get even more out of tax relief for pension contributions.
Hiding savings under the mattress
Inflation, like house fires, can destroy the value of your pension, so it’s not advisable to leave your money lying under the mattress – or dormant in a bank account.
Instead, many savers prefer to put their savings into a savings account, but you need to pay close attention to the interest rates on offer if you do that. A lot of accounts also have strict terms and conditions that can limit the amount of money you can put in per month.
You might want to pay close attention to your pension scheme, too, and analyse how it invests in your pension. Are the potential returns the kind you’re looking for?
Am I saving enough for my retirement?
Saving for retirement is no easy task; it can be difficult to work out what you need to budget without a large margin of error that could cause you a lot of headache and stress later in life.
Taking on the task by yourself is doable, but are you sure you’re willing to risk going it alone — especially without the guidance of someone who’s helped many other people just like you successfully plan for retirement?
If not, look no further than our pension and retirement team. We’re here to help and are more than happy to discuss your situation.
Get in touch with us today to discuss your pension and retirement plan.