Pension experts have crunched some numbers to come up with how much an average worker needs to save to retire on a target annual income of two-thirds of their final salary.
The average salary at retirement is £27,000, according to government figures.
To maintain the standard of living this salary buys in retirement, savers need an annual income of £18,000 or £1,500 a month, say financial experts at pension firm Aegon.
So, an average earner with the full state pension of £691 a month needs an extra £809 a month from personal and workplace pensions to bridge the financial gap.
Aegon says someone aged 65 in good health would need a pension fund of £301,500 to buy a guaranteed £808 a month for life that rises in line with the cost of living.
12 million under saving
Someone earning £56,000 at retirement who wants to maintain their lifestyle would need £28,000 a year after stopping work – a state pension top-up of £1,642 a month that would cost £612,700.
Even someone earning an average £13,000 at retirement would need a pension pot of £65,300 to maintain their lifestyle – almost double the current average pension pot value.
Steven Cameron, Aegon’s pensions director, said: “The auto-enrolment review identified that there are 12 million people under saving. It’s perhaps not surprising that people are under saving when you see how much generating an annual income of £18,000 costs. The amount is so high because life expectancies have grown significantly in recent decades and long-term interest rates, on which annuities are based are currently very low. All these figures assume that people will be able to top up their income with the full state pension of £8,300 per year, but it’s important to check what you’re due as many people will receive less.
“While automatic enrolment is helping plug the pension gap for employees, many of us face a shortfall which won’t go away on its own.”
Cameron also warned that many retirement savers will have seen their financial options change after the introduction of pension freedoms in 2015.
“Many people planned their retirement around when their state pension would start and used their retirement fund at that age to buy a regular income for life,” he said.
“Pension freedoms have proved popular and many are dipping into their pensions, or even cashing them in entirely from as early as age 55, long before they reach state pension age. While this is an attractive option for those who can afford it, the more that’s taken earlier, the less is left to maintain lifestyle in later years of retirement.”