Everything you need to know about pensions – and how much you need to save for retirement 

Are you saving for your retirement yet? Find out how pensions work, how much you might need to save up and what you can do now – even if you think you’ve left it too late. 

When we’re younger – when we SHOULD start saving for a pension if we’re savvy, retirement seems a long way off. We assume we have plenty of time, and besides, there are lots of things we’d rather or need to spend our money on now.

As the years go by, life continues to be expensive. We have rent, maybe a mortgage, bills, holidays, weddings, babies, DIY… there’s plenty of competition for our hard earned money, and finding the money for a pension, which still feels far away, might never make it to the top of our list of priorities. Or perhaps the spare money just isn’t there. 

Then one day, often after you turn 50, you realise that retirement is scarily closer than you think, and you haven’t prepared for it as much as you may have hoped.

But, while yes, it’s true that the best time to start saving for a pension is in your 20s, you don’t need to panic quite yet as the next best time to start is now. With some thoughtful planning there’s still lots you can do to help you enjoy your retirement. And that’s what we want to help you do. 

With that in mind, the aim of this article is to demystify pensions, to answer your pension questions, help you feel more in control of your finances, and empower you to take positive action for your retirement right now – whatever your situation.

To start, let’s explore what a ‘pension’ actually is, and how they work. 

What is a pension?

A pension is a tax-efficient way of saving up money to give you an income to live on in your retirement.

In the UK, if you qualify, you can receive the State Pension from the age of 66 (this will rise to 67 in 2028). You may have a workplace pension, where you and your employer both contribute. You can also save up for a private pension.

You can save money into several different pensions as long as you stay within the annual limits. You can read about the protections that exist to keep your pension safe here.

When can you withdraw your pension?

If you wish, you can start withdrawing your pension from the age of 55 (this will rise to 57 in 2028).  You can take up to 25% as a tax-free lump sum and then decide what you want to do with the rest. You might choose to begin withdrawing some of your money via pension drawdown, buy an annuity, set up a regular withdrawal or even keep paying into your pension. 

It’s important to note that, if you do decide to withdraw money from your pension and keep paying in, you could be subject to the Money Purchase Annual Allowance (MPAA). The MPAA restricts your pension contributions eligible for tax relief. For tax year 2023/24 the MPAA is £10,000.

How can you take money out of your private or workplace pension?

So what happens when you want to retire? How can you actually take money out of your pension? There are a few ways people take money from their private and workplace pensions:

  • Buying an annuity
  • Pension drawdown
  • Taking a lump sum
  • Regular withdrawals

If you have an NHS pension, you can read answers to some of the most common questions asked about the scheme here. You can also learn more about public pensions here.

What’s an annuity?

You can use your pension pot to buy an annuity from an insurance company. An annuity is an income that is paid to you for a fixed period of time or for the rest of your life. The amount you receive is determined by your annuity rate.

The final annuity income you might get depends on variables like your age, health and where you live. As a rule, the older you are, the higher the annuity rates you may be offered. There are many different types of annuities that you can buy, so you can find the one that suits you best. 

  • Benefits of an annuity: You have a guaranteed income for a fixed period of time or for life, your pension is guaranteed to last and you may have the option to pass your annuity on to your beneficiaries depending on the type you have and if you’ve started receiving income.
  • Potential downside of an annuity: Annuities can be complex, may have high fees and purchasing an annuity is irreversible. 

What’s pension drawdown?

With pension drawdown, you can leave your pension invested, and take money flexibly as and when you need it. Unlike an annuity, pension drawdown doesn’t give you a guaranteed income for life, but it does offer flexibility and you can still pass on your pension to your beneficiaries.

You can draw down your pension from the age of 55 (this rises to 57 in 2028). You can also take up to 25% of your pension completely tax-free. This can be as a lump sum or in portions. The remainder of your pension will stay invested and can be withdrawn as and when you wish. Remember that you will need to pay income tax on anything you take over your 25% tax-free amount.

  • Benefits of pension drawdown: You can withdraw your income flexibly and can change how much and when you get income from your pension.
  • Potential downside of pension drawdown: The size of your pension pot can increase or decrease, depending on how your investments perform and you won’t have a guaranteed income each month as your pension isn’t necessarily guaranteed to last your whole life.

With PensionBee, you can set up regular withdrawals. This is a type of pension drawdown which can help you manage your retirement income and instead of manually withdrawing the money, you can set up a regular payment.

How can you take a lump sum?

You could take a portion of your pension pot as a lump sum and leave the rest invested to draw down from it as and when you need. Withdrawing a chunk of your pension cash, rather than the whole lot, could also mean you pay less tax but remember only 25% of your pension pot can be taken tax-free. 

Withdrawing a large amount could potentially push you into paying higher rates of income tax and means your money no longer has the opportunity to grow within the pension. You might be able to avoid this by spreading smaller withdrawals over several years. You also don’t need to take all of your tax-free cash at once. 

You could decide to pay tax on part of a withdrawal, so in future years you can still top up your income with tax-free cash. Let’s say you wanted to take 10% of your pension out as a lump sum. You could opt to take 5% out of your tax-free allowance and pay income tax on the other 5%.

How can you combine an annuity, taking a tax-free lump sum and pension drawdown?

If you wish, you can combine taking a tax-free lump sum with an annuity and pension drawdown. You could tax your 25% tax-free lump sum, use part of your pension to buy an annuity and leave the rest invested to draw down from when you wish. Combining may give you the predictability of an annuity with the flexibility of pension drawdown.

You can read more about the pros and cons of pension plans here.

How much money do you need when you retire?  

Now we have an understanding of what a pension is, let’s look at how much you might want to save up for your retirement. There are different ways to save for retirement and one option to consider is a defined contribution pension transfer.

All too often, when we think about pensions, we panic, assuming we need a bottomless pot of money that is impossible to acquire, especially if we have left it late to start saving. 

We find it can be helpful to flip your thought process around, and instead consider what kind of retirement you want, and how much that lifestyle may cost. We can then have a better idea of how much money you might need saved up for your retirement, and what you need to do now to get close to that. 

So, in this article we’re going to explore three key areas:

  1. What kind of retirement do you want?
  2. How much money do you realistically need for it?
  3. How can you get that money?

We want you to leave this article with a clear action plan to help you start saving for your ideal retirement. 

What kind of retirement do you want?

To start, think about what kind of retirement you want. For example, do you envision yourself jetting off around the world on five star holidays and dining in expensive restaurants when you give up work? Or do you dream of pottering around your garden and enjoying the simple life?

As you can imagine, these two scenarios require very different levels of funding. So ask yourself how you see yourself spending your time once you finish working. And then consider what kind of budget that might require. 

To help you, The Pensions and Lifetime Savings Association’s (PLSA) Retirement Living Standards, calculates that, if you are single when you retire, you would need:

  • £14,400 a year for a minimum lifestyle
  • £31,300 a year for a moderate lifestyle
  • £43,100 a year for a comfortable lifestyle

And a couple would need: 

  • £22,400 a year for a minimum lifestyle
  • £43,100 a year for a moderate lifestyle
  • £59,000 a year for a comfortable lifestyle

So what do these different lifestyles mean? Here’s how they define them:

  • A minimum lifestyle covers all your needs, and gives you some left over for fun, such as the odd meal out. It doesn’t cover the cost of a car, but does include a long weekend away in the UK every year. It also gives you £54 a week for food, and up to £580 to spend on clothing and footwear a year.
  • A moderate lifestyle allows for more financial security and flexibility, and can afford you two weeks in Europe a year. It will cover the costs of a three year-old-car, changed every 10 years, and gives you £74 a week for food and up to £791 to spend on clothing and footwear. 
  • A comfortable lifestyle gives you more freedom and some luxuries, such as three weeks in Europe a year. It also covers replacing your kitchen and bathroom every 10-15 years, the cost of a two year-old-car, changed every five years, £144 a week for food, and up to £1,500 for clothing and footwear. 

Think carefully about these three levels of lifestyle and consider how you’d like to spend your retirement years. It may be that you’re not bothered about a newish car or three-week holidays, but you’d like to eat out often.

It’s also worth considering when you want to retire. Obviously, the later you leave it, the more you can save, and the more you’ll have to spend when you do. If funds are tight, delaying retirement could be a strategy to consider. 

When you have an idea of how much money you’ll need when you retire, you can then start to formulate a plan of action to achieve it. 

How much State Pension will you get?

The first thing to remember is that you probably don’t need to find ALL this money each year. If you qualify for the full new State Pension you’ll currently receive £203.85 a week, or £10,600.20 a year for tax year 2023/24. (This rises to just over £11,500 a year for tax year 2024/25). You can check how much State Pension you’re eligible for and if you can retire before State Pension age here.

If you’re eligible for the full new State Pension, you only need to save enough to fill the gap left between your ideal lifestyle and your State Pension income. 

So from April 2024, if you are a single person this gap would be:

  • £2,900 a year for a minimum lifestyle
  • £19,800 a year for a moderate lifestyle
  • £31,600 a year for a comfortable lifestyle

And if you are in a couple, the gap would need to fill is:

  • Nothing for a minimum lifestyle (you will have an excess of £600 a year)
  • £20,100 a year for a moderate lifestyle
  • £36,000 a year for a comfortable lifestyle

How to boost your State Pension by deferring it

Not many people are aware that they can choose to defer their State Pension and increase the amount they receive each month. If you delay receiving your State Pension for more than nine weeks, it will rise each week. The rise is equivalent to:

  • 1% for every nine weeks you defer
  • 5.8% for every 52 weeks you defer

If you defer for one year, after April 2025 that means you will get just over £670 a year more. 

How to fill the gap between the cost of your desired lifestyle and your State Pension

So, now you know what kind of lifestyle you want when you retire, and how much this may cost. You also know what you might get in terms of your State Pension, and the gap that needs to be filled by your private/ workplace pensions or other incomes such as rental and investments. 

Next we’re going to look at how you may be able to fill that gap.

Check you don’t have a pension pot or investments you’ve forgotten about 

A starting point is to check you don’t already have a pension pot you have forgotten about. To find out, you can check here. You may decide to combine any existing pension pots into one, to make it easier to manage.

Check any other potential sources of retirement income

It’s also important to consider other forms of income you may have overlooked. This can include investments and rental properties. For example, if you have a rental property that earns you £12,000 a year after expenses and tax, that’s £12,000 a year you can deduct from your retirement  needs. 

Saving into a private pension 

So now we know:

  • What kind of retirement you want
  • How much this might cost
  • How much State Pension you might get
  • Any other existing income
  • The gap you need to fill

For the next step, we’ll look at your private pension options. When saving into a private pension, you have a few choices, depending on your employment status. 

Saving into a workplace pension

The good news is that, if you are employed, even part-time, by law your employer must offer you a workplace pension scheme and contribute towards it if you are:

  • At least 22 years old
  • Have not reached State Pension age
  • Earn more than £10,000 a year
  • Are not already a member of a suitable workplace scheme.

If you earn less than £10,000 but above £6,240, your employer doesn’t have to automatically enrol you in their scheme. However, if you ask to join, your employer will be unable to refuse you and must make contributions on your behalf.

Saving into a pension if you are self-employed

But what if you work for yourself? The good news is that there are tax benefits to saving for a pension that make it an attractive way to invest money. 

If you are self-employed, and a basic rate taxpayer you will usually get a 25% tax top up. This means, as a basic rate taxpayer for every £100 you contribute to your pension, you’ll get another £25 from the government, making it £125. If you are a higher or additional rate taxpayer you can claim further tax relief through your Self Assessment tax return.

Saving into a pension if you have a limited company

If you have a limited company, any contributions you make to your pension through it could be treated as an allowable business expense, and may be offset against your corporation tax bill. It’s one of the few remaining tax perks of a limited company!

It’s worth noting that, while there’s no limit to the amount you can pay into your personal, self-employed or contractor pension, there are limits to the amount you can contribute and still receive tax relief. The limit is currently up to 100% of your salary or £60,000, whichever is lower. 

Your rights to your partner or spouse’s pension

But what if you aren’t working? Or not earning enough to save into a pension? What are your rights to your partner or spouse’s pension?

In a nutshell, here are your rights:

  • If you are unmarried and you split, you have no legal right to your partner’s pensions.
  • If your partner dies, the pension scheme will usually be paid out to their “nominated beneficiary” in line with their wishes. It is important to ensure these are kept up to date with the pension scheme administrator. 
  • If you divorce, you can ask the court to split your spouse’s pension with you in a process called a Pension Sharing Order (PSO).

If you haven’t legally ensured you are protected in the event your partner or spouse dies or you split, it is important to address this. 

It’s also not unreasonable to start your own private pension from family funds if you are taking time away from work, or reducing your income potential, because you are caring for your children. It is important you build your own financial legacy as a mother.

You can read more about protecting your pension if you divorce here, and how to split your pension fairly here.

How much do you need to save for your retirement?

So now we know what income you may need for your desired retirement lifestyle, and what your pension options and tax benefits are, let’s put it all together and see how much you need to save. 

Obviously the earlier you start the better. But it may be that you haven’t yet got any or much saved for your pension. So let’s look at what you may need to save. 

  • If you are single, are entitled to the full new State Pension, and want a moderate lifestyle, you may need an extra income of £19,800 a year. 
  • If you are in a couple, are both entitled to the full new State Pension, and want a moderate lifestyle, you each may need a joint extra income of £20,100 a year.

How much do you need to save for an income of £20,000 a year? The following examples have been worked out using PensionBee’s pension calculator. They assume your employer will contribute £100 a month and you’ll retire at 70:

Obviously, the more you have saved up in your pension, the more you’re likely to be able to have as an income from it, although the value of your investment can go down as well as up, and you may get back less than you invest. Here’s a rough guide of what kind of income you could expect from different sized pension pots*:

  • £285,000 could pay out up to £20,000 a year for 20 years
  • £425,000 could pay out up to £30,000 a year for 20 years
  • £575,000 could pay out up to £40,000 a year for 20 years

*Please note, the PensionBee calculator assumes investment growth of 5% every year, inflation of 2.5% and one annual management fee of 0.7%.

33% of women over 50 have no private pension

One of the reasons why we were inspired to write this article was the realisation that many women have no private pension yet. 

According to the 2023 Life Well Spent report, around 20% of men over 50, and 33% of women over 50 are relying on the State Pension alone to fund their retirement. And of these people, 92% are worried about money, and 85% are concerned about the rising cost of living.

A survey by SunLife also found that 18% of working homeowners aged over 50 had no private pension savings. 

If you’re in this number and are worrying you’ve left it too late to save for your retirement, please don’t panic – and definitely don’t do nothing as a result! 

Even if you start saving in your 40s or 50s, you can give yourself more financial options in retirement. And remember: for every £1 you put into a pension now, you may benefit from compound interest AND often, if you’re eligible, get employer or tax help to grow your savings.

An example of starting a pension in your 50s

Here’s an example of how you can start saving – and the benefits that gives you – even if you are relatively close to retirement age. 

Jo is 55 and plans to retire in 10 years, but hasn’t yet started a private pension. She’s self-employed and earns £30,000 a year. She decides to start a pension and pay in 7% of her gross income, which is £175 a month, deducted before tax.

If Jo continues this for 10 years and averages growth of 4%, that means she’ll have over £32,000 when she retires. However, she’s actually paid in just £21,000. (For comparison, in order to achieve the same performance, an ordinary investment fund would need to return a consistent 8% interest a year.)

If Jo opts for pension drawdown when she retires, she could take around £2,100 a year from it until she is 88. And remember: the pot still has the potential to grow during this time as the remainder of her pension pot is still invested. This means she may be able to withdraw around £49,000 in total, depending on market performance. All from a £21,000 investment, which means Jo has more than doubled her money. 

If you’re five or 10 years younger than Jo you have even longer to save up money, and to potentially benefit from interest-based growth. 

Pensions are a powerful, tax advantaged investment option – even if you start one late

As you can see, even though Jo started saving for her retirement late, thanks to the potential interest and tax benefits, she made her money work hard for her. So please, don’t think of pensions as ‘just another way of investing money’. They are actually a powerful, tax-advantaged investment option that may help you achieve your retirement plans.

So yes, while it’s wise to start a pension as early as you can, even if you have left it late, you may still benefit significantly from one. And if you haven’t left it late, you are in the fortunate position of being able to start saving now – and look forward to hopefully enjoying the retirement you want. 

Your pension action plan

So what should you do now? We wanted to leave you with clear steps to take after reading this article, so you can enjoy the retirement you want. 

Here’s your pension action plan:

  • Check your State Pension: Are you on track to receive the full new State Pension? If not, can you afford to top it up?
  • Check existing pension pots: Do you have any existing pension pots you may have forgotten about?
  • Check other retirement income sources: Identify any other sources of retirement income, such as rental property.
  • Check your partner’s pension savings: If you’re in a relationship, ask your partner or spouse about their pension.
  • Ask them to make you a nominated beneficiary: If you and your partner decide that you should receive their pension if they die before you, ask them to add you as a nominated beneficiary.
  • Check your wills: Do you and your partner both have up to date wills that financially protect the other? If not, write new ones.
  • Decide what kind of retirement you want: Think about what kind of lifestyle you want when you retire, and how much that might cost. 
  • Work out your ‘pension gap’: Calculate your shortfall after your State Pension income, existing pension pots, alternative income sources and your partner’s pension provision (if they have one).
  • Decide when you want to/can afford to retire: Identify how many years you have left to save for retirement.
  • Calculate how much you can afford: Look at your income and outgoings and work out how much you can contribute each month to a pension. Can you cut back on any expenses to save more?
  • Start saving ASAP: Consideropening a pension and saving as soon as you can – remember, every month counts!

Risk warning: As always with investments, your capital is at risk. The value of your investment can rise or fall, and you could receive back less than you invest. This information should not be considered as financial advice.

About PensionBee

PensionBee can help you combine your old pension pots into one online plan that lets you keep track of your balance, make flexible contributions, invest in line with your values and make withdrawals from the age of 55. For more information, visit PensionBee.

Learn how long your pension could last with the PensionBee Pension Calculator.

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