Retirement Income 

Average earner needs a £260k pension pot

Average earner needs a £260k pension pot

The pension pot needed for a comfortable retirement has increased by 75 per cent since 2002, research from Royal London showed.

The average earner now needs a pension pot of around £260,000 today to make sure they can maintain their standard of living into retirement, which compares to £150,000 16 years ago.

This increase is because people are living longer and interest rates are much lower, which means a given pension pot generates a smaller income, Royal London said.

In its new policy paper - Will we ever summit the Pensions Mountain? – Royal London used a salary of just under £27,000 a year and assumed the individual draws a full state pension of just over £8,500 a year.

The analysis assumed retirement would bring some cost savings such as no longer having to pay a mortgage, no longer having to contribute into a pension and no work-related costs such as season tickets and others, and therefore suggested workers who can retire on two thirds of their pre-retirement wage would see no fall in their standard of living when they stop work. 

This means a private pension income of just over £9,000 is needed in addition to the state pension.

Royal London’s research also took into account the fact fewer people would have become home owners during their working life and more will have to fund a rent out of their retirement income.

For the minority of pensioners who will be renting from a local authority or housing association, this meant an extra £125,000 will be needed in pension saving to generate an income sufficient to cover ongoing rent in retirement. 

But for the growing number of pensioners renting from a private landlord, higher private rent levels mean a total pot of £445,000 will be required - £185,000 more than for someone who has no rent or mortgage costs in retirement.

Helen Morrissey, personal finance specialist at Royal London, said the research was a reminder that when people save for retirement they were "chasing a moving target". 

She said: "If our retirement pot is going to support us through a longer retirement and in an era of lower interest rates, we are going to need to build a much bigger pot than in the past.

"More worrying still, we can no longer assume that we will be mortgage-free homeowners in retirement. For those unable to get on the property ladder during their working life, a large private rental bill needs to be factored in to retirement planning. 

"For all of these reasons, we cannot afford to be complacent about current levels of retirement saving."

Ms Morrissey said the analysis had big implications for the minimum auto-enrolment thresholds.

Auto-enrolment minimum pension contributions increased last month, from 2 per cent to 5 per cent and in 2019 it will increase again to 8 per cent, with the employee paying 5 per cent.

There are now more than nine million people auto-enrolled in a workplace pension scheme.

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