How much will I need in my pension? Why experts say you want £1 million for a comfortable early retirement
Savers hoping to retire early with a “comfortable” income will need a pension worth £1m – and to save more than £11,000 a year throughout their career to build up the pot.
Early retirement is currently in vogue, with 565,000 workers having left the workforce since the start of the pandemic, according to the House of Lords. While the reasons behind the exodus are unknown, the primary driver is thought to be early retirement among those aged between 50 and 64.
But you need a hefty pension pot to join the trend: here’s how much you might need, the amount you would need to save, and what you need to think about.
How much money do you need in your pension to retire early?
How large a pot you need depends, of course, on how much you want to spend in retirement.
The Pensions and Lifetime Savings Association (PLSA) suggests that you will need to spend £37,300 a year to have a “comfortable” retirement, after tax and any housing costs.
This lifestyle includes £144 a week on food, replacing your car every five years, three weeks of holidaying in Europe every year, and up to £1,500 annually to spend on clothes and shoes.
According to wealth manager AJ Bell, you would need a pot worth £1m to retire at age 55 and be able to spend this level of income. If you waited until age 65 to retire instead, you would need £730,000 in your pension pot.
You might be happy with a less luxurious retirement, though. The PLSA says that a “moderate” retirement – £74 a week on food, replacing a car every 10 years, two weeks in Europe plus one long weekend in the UK and £790 for clothes and shoes – would cost £23,300 a year.
If you wanted to retire at 55 and have a “moderate” retirement, you would need a pension pot worth £540,000, according to AJ Bell. If you waited 10 years and retired at 65, you would need a pot worth £360,000.
The calculations assume investment growth of 4 per cent a year, a full state pension from age 68, that you have already taken your 25 per cent tax-free cash and that your income requirements increase by 2 per cent a year (the Bank of England’s inflation target). In each scenario, the pot runs out at age 91.
The actual amount you need in your pot will depend on your personal circumstances, investment growth, and inflation, so it’s worth adding on an emergency buffer to your target pension pot size.
How much do you need to save each year to retire early?
If you want to retire at 55 and have a “comfortable” retirement – and therefore build a £1m pension pot – you would need to save £11,500 a year into your pot from age 22, increasing your contributions by 2 per cent each year, AJ Bell said.
This figure includes tax relief (20 per cent for a basic-rate taxpayer, 40 per cent for higher-rate and 45 per cent top-rate tax) and any employer contributions, so the amount you actually pay in would be less.
In reality, you are more likely to pay in smaller amounts at the start of your career, when your salary is lower and you’re saving for other life events, like a house deposit or a wedding, and boost your contributions as you build your overall wealth. However, these figures can give you a rough idea of the type of savings you need to make.
If you were happy with a “moderate” retirement, but still wanted to retire early at age 55, the figure would be more like £6,000 in the first year. The amount drops substantially if you plan to retire a decade later, at age 65: someone who wants a “comfortable” retirement would need to pay in £4,600 in the first year, while a saver hoping for a “moderate” retirement would need to pay in £2,300.
“The figures show that, even if you start saving very early, to stop working and enjoy a comfortable living standard in your mid-50s will likely require significant annual contributions,” said Tom Selby from AJ Bell.
“Remember that the earlier you start taking retirement income, the larger the fund you will need. This is doubly challenging as you will have fewer years to build up this larger pot.”
It’s important to note that the minimum pension age — the age at which you can access your pension — is increasing to 57 in 2028, so if you want to retire at 55 after this date, you will need some savings outside of your pension, such as an Isa.
How do you build up a big pension pot?
Unfortunately, there is no magic way of creating a large pension pot outside of saving as much as you can. However, there are things you can do to make it easier to reach your pensions goal.
Preparing as early as possible will give you the best chance of creating a large pot. This is thanks to compound interest, the interest you earn on interest, as well as contributions.
If you paid in £200 a month over 30 years, with 4 per cent a year investment growth, your pot would be worth about £140,000. If you paid in £400 a month over 15 years — so the same amount but over less time — the pot would be worth more like £100,000
You should also make sure that you’re not playing it too safe with your savings. Over time, the stock market typically outperforms bonds or cash, and your workplace scheme could be lower risk than you expect.
In the decade to 2021, UK equities returned 4.7 per cent a year in real terms (after inflation), US equities returned 12.5 per cent, government bonds returned 1 per cent, and cash lost 2.5 per cent, according to Barclays’s Equity Gilt study.
“Don’t be put off by the large overall pension pot figures you might need to achieve a ‘moderate’ or ‘comfortable’ living standard in retirement,” said Selby. “The most important thing is to set aside what you can afford as regularly as possible, and invest your fund in a way that matches your appetite for risk and financial goals.”
