Average pensioner income is £19,240 a year – so how much money do you need to save?

Martin Lewis on how much you should be putting in your pension

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More than half of that income comes from company and personal pensions and other savings, so people who rely on the State Pension alone will fall well short. Building savings in your own name is vital but people face two problems.

The first is that most have no idea how much they need in total savings to fund a comfortable retirement.

The second is that they do not know how much annual income their savings will generate.

Now pensions expert Andrew Tully, technical director at Canada Life, has supplied answers to both these questions, exclusively for Express readers.

Official figures show the average pensioner received £19,240 of retirement income in the 2019/20 tax year.

That included State Pension and benefits, which paid people £9,412 a year on average.

That’s roughly half their total average income. “Pensioners then generated a further £9,828 from their own resources, such as workplace and personal pensions, tax-free Isas and other retirement savings,” Tully said.

So how big a nest egg do you need to generate that? Given today’s low interest rates, the answer may shock and disappointment many.

To buy a guaranteed income of £9,828 a year at age 66 would require a pension pot of approximately £192,000, Tully said.

This would buy you a level, single life annuity, which means the income would not rise in line with inflation and there would be no death benefits for a partner if you died first.

If you wanted that income to increase by three percent a year, you would need £294,000 of pension, Tully calculates.

That’s a challenging target, so how much do you need to save each month to hit it? Again, Tully has done some sums.

To build up a pot of £192,000 a 25-year-old would need to save £147 a month. The good news is that is that after basic rate tax relief, this would cost them just £117.

Somebody who started at age 40 would need to save £325 a month. After basic rate tax relief, the cost is £260.

Both these figures assume the investments grow at an average rate of four percent a year.

This shows the importance of saving as early as possible, Tully said. “The sooner you begin, the longer your money has to compound and grow.”

He said a pension is the most efficient way of building retirement savings, due to generous tax relief on contributions.

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Company pensions are particularly attractive, because employers typically contribute three percent of your salary to your pot. Some pay in more.

Tully said: “If you’ve been auto-enrolled into a pension by your employer, stick at it, and make the most of those employer contributions.”

He added: “Take full advantage if your employer offers to match any additional contributions you decide to make.”

You can further boost your pension retirement savings by paying regular sums into a tax-free Isa. Although there is no tax relief on contributions, all your returns are free of income tax and capital gains tax for life.

Tully said a pension needn’t be complicated or scary. “Just think of it as a long-term savings plan to provide for your retirement. There is plenty of help online or seek professional financial advice.”

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