The secret to a financially happy retirement? It’s £26,000 a year for a couple or £19,000 for a single-person household. That was the headline finding from research this week by Which?, the consumer body, which surveyed almost 7,000 retirees and concluded these were the average annual incomes needed for a comfortable retirement.
Which? included state pension income in its calculations (£16,000 a year for the couple and £8,000 a year for the single person is assumed), with the rest presumably having to come from other pensions.
But many people are not putting away nearly enough to build up a pension pot that will produce a decent retirement income, and the coronavirus pandemic has exacerbated these problems by putting a huge strain on millions of people’s finances.
Building up a decent pot can be particularly challenging for those who, for whatever reason, are late to the pension party, because they have less time to pay in, and their fund has less time to increase in value.
Research shared exclusively with Guardian Money found that a quarter of over-50s don’t have a private or company pension. Among women over 50, a third have no private or company pension and are set to rely on the state for their retirement income.
These are two of the findings from the insurer SunLife’s Finances After 50 report, which is due to be published later this month.
It is not too late to act
The retirement specialist Canada Life recently published research into the UK’s “late financial bloomers” – those who could end up with less money to retire on because of a range of factors that reduce their focus on retirement planning, including marrying later in life and having children later.
If you are already struggling with your rent or mortgage, household bills, childcare costs and so on, then putting aside another sum of cash each month may be impossible.
But if you can afford to put something by, it is not too late.
Ros Altmann, a retirement expert and a former pensions minister, says you are “certainly not” too old to start saving, even if you are in your 50s. “You could save for another 15 or 20 years and benefit from long-term returns, which increases the money you have later in life,” she says.
You may still have a decade or more of working life, so there is still time to pay into a pension and top up what you receive as a state pension, says Carolyn Jones, head of pensions policy and strategy at the Money and Pensions Service.
“If you’re starting to save later in life, you should consider maximising your pension contributions. It can be hard to find spare money to save but if you get a pay rise or a bonus, or find you can free up some money by spending less somewhere else, think about paying a little more into your pension,” she says.
If you start a new job at any point between the age of 22 and the state pension age, your employer will be obliged to put you into a workplace pension scheme where you and they pay some money in. This is known as automatic enrolment. But do not assume this will be enough to provide you with a big payout: the minimum total contribution into the scheme is 8% of your pay, regardless of your age. As an older worker, you will have much less time to pay in and much less time for the fund to grow than if you were in your 20s.
The state pension
If you have made at least 10 years’ worth of national insurance contributions over your adult life, you will be entitled to some level of pension from the state. The maximum state pension for 2021-22 is £179.60 a week, which is £9,339.20 a year. To get that, you will need to have 35 years of contributions.
For an estimate of how much state pension you could receive, check your forecast here.
It is possible to boost your weekly state pension by delaying starting to draw it, Altmann says.
Your state pension increases by the equivalent of 1% for every nine weeks you delay – or defer – claiming it, which works out at just under 5.8% for every 52 weeks. So if you are entitled to £179.60 a week, by deferring for 52 weeks you will get an extra £10.42 a week.
“However, of course, you are not receiving any state pension until you do start taking it. Therefore, you may get a higher state pension but you need to live for a long time after you start taking it, in order to make up for the period in which you received nothing at all,” Altmann says.
How much to start saving
“There is no reliable hard and fast rule” to tell you how much to pay in, Altmann says. The traditional rule of thumb is that you should set aside about half your age expressed as a percentage of income. That would mean a 50-year-old saving 25% of their salary into a pension.
“But of course, none of this is accurate because it will depend on what pension you have already built up so far and what your aims are for a level of pension income that you would want,” she adds.
As an example, a pension pot of £100,000 could get you a retirement income on top of your state pension of perhaps £4,000 to £5,000 a year on average. The investment company Fidelity says that to get a pot of £100,000, with a target retirement age of 67, based on a relatively cautious investment style and assuming average market performance, you would need to put away a considerable sum if you only start at age 55: about £650 a month. If you start at 45, it is a lot less: about £300 a month.
These figures were calculated using Fidelity’s online retirement planning tool called MyPlan.
The carry forward allowance
It may be worth checking to see if you have any unused annual allowances on your pension savings.
The government places a cap on the amount you can save in your pension pots every year before you have to pay tax. This cap is known as the annual allowance and is £40,000 this tax year. Your annual allowance is made up of all contributions to your pension(s) made by you or anyone else, such as your employer.
However, some people who are on a mission to build up their pot may be able to carry forward annual allowance they did not use from previous tax years.
“Carry forward allows you to make use of unused annual allowances from the three previous tax years if you have used all your annual allowance for the current tax year. This means you may be able to contribute more to your pension pot this tax year (until midnight on 5 April 2022) and still benefit from tax relief, as long as you have the relevant earnings equivalent to the amount you want to contribute,” says Maike Currie, an investment director at Fidelity.
Carry forward may be particularly useful if you are self-employed and your earnings change significantly each year, or if you are looking to make large pension contributions, the Pensions Advisory Service says.
