Caroline Dabney-Rourke’s dream retirement includes at least one foreign holiday a year and several mini-breaks in Britain.
However, the 59-year-old, who runs a café, has only a tiny pension that will pay about £350 a year once she reaches 67 — nowhere near enough to fund the lifestyle she wants, even when added to the state pension. She owns a buy-to-let property but may be forced to sell it to clear the £250,000 interest-only mortgage.
Fiona Johnston is dreaming of foreign holidays, regular meals out and gym membership when she retires. The 41-year-old, who runs a hairdressing business, would also like to retire before her state pension age of 68 but knows she would need to add more to her £70,000 pension to do so.
Dabney-Rourke and Johnston are among millions of people who may have to make adjustments to have the kind of retirement they want.
About 38 per cent of workers do not have enough saved for even a “minimum lifestyle” in retirement, according to a survey of more than 5,100 people by the pension company Scottish Widows. This is up from 35 per cent a year ago.
So how do you know if you are on track for the retirement you want? Whether you are four weeks, four years or 40 years from collecting your pension, it is vital to pay attention to your pot to help you to plan for the future.
How much you need in retirement depends on the lifestyle you want. The Pensions and Lifetime Savings Association (PLSA) has a guide to how much you need to achieve a minimum, moderate or comfortable retirement.
Assuming you own your home with no mortgage, a minimum lifestyle in retirement requires £14,400 of income a year, according to the PLSA (£14,857 before tax). This would give you £50 a week for groceries, £25 a month on restaurants and a week’s holiday in the UK each year. Couples would need £22,400 (£23,000) between them to achieve this.
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For a moderate lifestyle, you would need £31,300 a year (£35,982 before tax). This would be enough for £55 a week for groceries and £30 on eating out, plus a two-week three-star holiday in the Mediterranean each year, as well as a long weekend in the UK. Couples would need £43,100 a year.
For a comfortable retirement, which gives you £70 a week on food and £40 a week on meals out, a four-star holiday in the Mediterranean and three weekends away in the UK each year, a single person would need £43,000 a year (£50,887 before tax), and a couple £59,000.
We asked the wealth manager Evelyn to calculate how much you would need to save to achieve the level of pre-tax income in retirement you want, depending on what age you start saving.
The calculations assume you get the full new state pension, at present £11,502, and do not take out your 25 per cent tax-free lump sum from any private pension. Instead, our sums assume you use all your money from a private pension to buy an annuity, which is an income for life. The private pension is assumed to grow by 4 per cent a year after charges.
For simplicity, the analysis used today’s figures for tax rates and thresholds, as well as annuity rates. The analysis ignores what the state pension and PLSA figures may be in the future.
For a minimum retirement lifestyle, you would need your savings pot to be large enough to generate an income of about £2,900 a year (£3,356 before tax) after taking into account what the state pension pays. Assuming you retire at 68, Evelyn said you would need a retirement pot of £67,749 in today’s terms to achieve this.
If you started saving at 20, you would need to pay £40.83 into a pension every month. This includes tax relief and employer contributions if you are part of a workplace scheme.
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The later you start saving, the more you need to set aside. If you started at 30 you would need total monthly pension contributions of £66. At ages 40, 50 and 60, your contributions would need to be £114, £229 and £688 a month respectively.
Anyone dreaming of a more luxurious retirement will need to save a lot more. For a moderate lifestyle, you would need a pot worth about £494,000, Evelyn said. A 20-year-old would need monthly contributions of £298 to achieve this, and a 30-year-old £484. Leave it until age 40 and you would need to save £840 a month; at 50 it is £1,668; and for a 60-year-old, monthly contributions would need to be £5,008.
For a comfortable lifestyle, you would need a pot worth £794,000. Monthly contributions if you start at 20, 30 or 40 are £479, £779 and £1,352 respectively. Those who put off saving until 50 would need to set aside £2,688 a month, and if you wait until age 60 you would need monthly contributions of £8,058.
Craig Rickman from the trading platform Interactive Investor said: “Tucking away enough money to retire on your own terms is no walk in the park. Waiting ten years to kickstart the savings process could mean you need to contribute twice as much to a pension every month to achieve the same level of retirement income.”
Johnston started saving into a pension when she was 30 and setting up her business. Initially, she saved £85 a month but has increased contributions to £400. Her pot is worth about £70,000 today.
If she keeps paying the same amount into her pot, she will have about £436,000 by the time she reaches her state pension age of 68, assuming a 4 per cent annual growth after charges.
If she used this money to buy an annuity, based on today’s rates, she could have an annual income of £22,106. Assuming she also gets the full state pension of £11,502, her total income would be £33,608 — £29,400 after tax.
But Johnston wants at least one overseas holiday a year after she retires, so she will need to save more. To achieve a moderate lifestyle, which would allow this, she would need to increase her monthly contributions to about £480, according to Evelyn. For a comfortable retirement she would need to save £725 a month.
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Johnston said: “I know I’ll have to increase pension contributions to have the kind of lifestyle I want in retirement, but the cost of living crisis has made me nervous about saving more and not having enough disposable cash.”
Dabney-Rourke has a small pension from Surrey Council, where she worked for nine years. It will pay about £350 a year in retirement. That means Dabney-Rourke, who lives in Rudgwick in West Sussex, is relying on the income from her buy-to-let property instead.
The four-bed property, in Dorking, generates rent of £2,450 a month giving her an income of £29,400 a year before tax. This, together with the state pension and her Surrey council pension, would give her a total pre-tax income of £41,152 a year.
However, Dabney-Rourke has a £250,000 interest-only mortgage on her buy-to-let, which costs her £1,100 a month. Assuming this stays the same, this would reduce her pre-tax income to £27,952, leaving her with about £23,650 after tax.
This is more than the £14,857 needed for a minimum lifestyle but considerably less than the £35,982 needed for a moderate one.
Dabney-Rourke’s plan is to sell her rental property before she retires — although the mortgage is not due to be repaid until 2042, when she will be 77. She bought the buy-to-let in 2012 for £395,000 and spent £60,000 adding a fourth bedroom and off-street parking in 2017. She estimates the house is now worth about £800,000, so hopes the gain she has made will help to clear the mortgage and provide a nest egg for retirement.
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She said: “By the time I reach pension age, I’ll make a decision about selling up and using the proceeds to fund retirement. If I had to work past state pension age, I would be disappointed that I couldn’t pursue the hobbies that I enjoy while I have my health.
“We owe it to ourselves after working and raising children, to be able to enjoy our latter years without the stresses and strains of life and worrying about when the next penny is coming in.”
It is important that you are realistic about what your actual expenditure will be in retirement. Consider that you may have free time or might want to tick off bucket-list items such as a dream holiday.
Gary Smith from Evelyn said: “From my experience, even those who aim to have a monthly expenditure of £2,000 in their retirement often find this isn’t sufficient to meet their requirements and they either need to alter their lifestyles or make trade-offs.”
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Work out what your basic living costs are, such as any housing costs and groceries, and then consider what are your “must-haves” for a happy retirement lifestyle — perhaps you are willing to cut back on meals out but not on travel, for example.
“Remember to consider your expenditure requirements at different ages,” Smith said. Typically, in retirement, many people spend more at the start when they are younger and have their health, before their spending eases off as they settle into retirement. There is then usually an uptick in spending at the end of life because of care costs.
Natacha Hansen, 26, has been paying into a pension since she was 19.
Her father set up a child’s pension for her when she was three and contributed regular amounts. By the time she took charge of the account at age 18, it was worth £27,000.
Hansen now pays about £4,000 a year into her self-invested personal pension, which she holds with the wealth manager Interactive Investor. She already has £79,000 saved.
As a self-employed musician, Hansen said it can be hard to save regular amounts: “I have some regular income from teaching work at schools, but they are zero-hour contracts so it can be quite random. I also do the occasional gigs and events. The key for me is to try and set aside at least something into a pension each month.”
If she continues saving at her current rate, she is on track to have a pot worth about £880,000 by age 68, according to Evelyn, assuming 4 per cent a year growth after charges.
Hansen, who lives in Greenwich, south London, said: “My dad has taught me to be disciplined with money and make sure I set aside as much as possible for the future. It’s difficult to imagine what retirement will be like, but I hope to live in some comfort if I can.”