With the cost of living and a recession, many individuals are starting to wonder how this will impact their retirement in the future, according to private and commercial bank Artbuthnot Latham.
One of the questions the financial experts at Arbuthnot Latham are being asked is "how much should I have saved for my pension?".
The firm said the amount needed to save towards a pension depends on how much an individual wants to live on when they retire.
To take a simple example, the mean UK average wage is £38,131.
If someone was earning the UK average wage upon retirement today, assuming a retirement age of 65, and wanted to maintain their current lifestyle, data suggests that the average person would need enough in their pension pot to guarantee that income for around a 21-year retirement, based on current life expectancy statistics.
That works out to needing approximately £800,751 pre-tax.
However, there are other important considerations that this simple calculation does not account for, and cash flow modelling is a better way of working out how much you might need, Arbuthnot Latham explained.
Cash flow modelling considers factors beyond an individuals goals, such as inflation and the assumed growth in the value of investments.
“It can also consider one-off events such as downsizing your home or receiving an inheritance,” the firm explained. “This can help form a picture of how much you need to save each month. “
How much money should I save each month for my pension?
The benefit of compounding means that the gains – in theory – get exponentially bigger over a longer period, as illustrated in the graph below.
Source: Arbuthnot Latham
Arbuthnot Latham said the earlier an individual starts, the more they can amass over time.
“With any excess income, it is important to balance the amount you pay into your pension with your other needs,” it said.
“A wealth planner can help you find the optimal mix.”
The table below shows the projected outcomes of someone starting to put £200 a month into a standard workplace pension from the age of 20.
| Savings amount per month | Projected savings aged 55 | Projected savings aged 68 |
|---|---|---|
| £100 | £195,933 | £464,305 |
| £200 | £391,866 | £838,416 |
| £300 | £524,571 | £1,118,873 |
While there are many types of personal savings plans available, many use their work-provided scheme as their main form of pension planning.
Schemes can differ, but they can offer some, or all the following benefits:
- Tax efficiency - pension contributions are often deducted before tax and National Insurance contributions are calculated, although there are limits to tax-free allowances.
- Assets inside a pension grow free from income tax and capital gains tax (and can be passed on free of inheritance tax).
- Employer contributions - employers must contribute a percentage towards your workplace pension.
- Compound gains – if it is invested well, the pot also grows over time above your own investment.
The crucial component here is the compounding factor and this is why it is so crucial to begin saving as early as possible for your pension.
| Year | Starting point | Gain | End year |
|---|---|---|---|
| 1 | £1,000 | 10 per cent | £1,100 |
| 2 | £1,100 | 10 per cent | £1,210 |
| 3 | £1,210 | 10 per cent | £1,331 |
To put this into context, if you invested $100,000 (£81,929) in the S&P 500 at the beginning of 1991, without making further contributions, you would have amassed $2.7mn (£2.2mn) at the end of 2021; that equates to 2,617 per cent.
Paul Clifton, director of wealth planning at Arbuthnot Latham said: “Pensions form a key part of most people’s wealth strategies. From initial tax benefits and employer contributions to inheritance tax benefits, they are one of the most efficient investment vehicles.
“However, there are many elements to consider from risk appetite to when and how you might want to access your pension. There is no 'one size fits all' approach, and professional financial advice is key to ensure your wealth management strategy is designed to meet your future financial – and lifestyle – goals.”
sonia.rach@ft.com
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