Retirement Income  

Pension pot of £447k needed to retire well

Pension pot of £447k needed to retire well

Savers will need to reach the retirement age of 65 with a pension pot of almost £450,000 for it to last until they are 100 years old, according to AJ Bell.

Research from AJ Bell, revealed a pension fund of £447,000 was needed to retire at the age of 65 on an average UK salary that could be sustainable until age 100.

AJ Bell warned of the need to start saving sooner rather than later. Its analysis has shown that to save the £447,000 required for an average salary in retirement from age 65 to 100, a 25 year-old would need to save £235 a month.  

If an individual delayed this by 10 years and started saving at 35 the monthly saving figure would almost double to £428 and for a 45 year old it would reach £859 a month.

Tom Selby, senior analyst at AJ Bell, said: “If these amounts sound unrealistic it’s still worth saving what you can, making the most of the bonus of pension tax relief and the matched employer contribution through automatic enrolment.

“You also need to think carefully about the investment risk you want to take. Younger investors in particular should be able to take more risk than their older counterparts, giving their fund the chance to grow over time. In addition, high charges can have a seriously detrimental impact on your retirement over the long-term, so shopping around is absolutely critical. 

“If people get this bit right and build a decent pension pot in the first place, it becomes much easier to make that pot last – even over a lengthy retirement.”

Pension fund required for an inflation linked pension income of £20,000 to last until age 100:

Retirement age

Starting income

Pension fund required

Total income taken to age 100

65

£20,000

£447,000

£999,890

70

£20,000

£407,000

£811,362

75

£20,000

£362,000

£640,606

Assumes 5 per cent investment returns after charges, income inflation linked at 2 per cent a year, pension fund runs out at age 100

According to the Office for National Statistics, a 65 year-old woman today has a 7.4 per cent chance of celebrating their 100th birthday (4.7 per cent for a man of the same age).

This increases significantly for future generations with a 25 year-old woman having a 19 per cent chance of reaching 100 (14.1 per cent for a man the same age).

About 56,000 people are expected to reach 100 by 2020 - compared to just 6,000 in 2016.

Mr Selby warned that this increase in longevity meant people must manage their retirement plans better.

He said: “People who choose to transfer out of defined benefit schemes or opt for drawdown over buying an annuity therefore need to plan withdrawals carefully to make sure they remain sustainable. 

“Younger generations in particular will need to consider the possibility their pension savings will need to last 35 years or more or they will need to retire at a later age.”

“The extent to which a withdrawal strategy is sustainable or not will depend on a number of things including overall investment returns, the timing of those returns and inflation.”

For example, if someone wanted to retire on a UK average salary of £28,000, if they received £8,770 from their state pension, they would need to be aiming to generate just under £20,000 from their private pension pot.