Chancellor George Osborne is trying to instil a savings culture in the workplace so everyone has enough money to fund a comfortable retirement – but no one really knows how much they need in the bank to see them through their golden years.
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The problem is we know death is inevitable, but just not the exact date.
Retirement savers have to pluck an average out of the air and hope they have enough money put aside to pay the bills, fund a few luxuries and maybe to fork out for expensive long term care.
Financial experts argue that saving a little for a long term is the best way to save due to the wonders of annual compound interest.
The suggestion is putting aside 15% of salary even if you are in your 20s and maintaining the percentage each time your salary goes up throughout you working life.
Realistic goals
Online pension calculators available from many providers, such as Standard Life, can help you estimate how much cash you will need when you retire.
The guys that designed the calculator have done the heavy lifting by analysing piles of data and coming up with the formulas, so all you have to do is input your current pension fund value, your age and salary.
Further down the line, the question that needs figuring out is how to convert a pension lump sum into income.
The key ages are 55 years old, when any pension saver can start taking cash from their fund under flexible access rules and the state retirement age.
You may think saving £100,000 will see you through retirement, but the projected current income from such a fund is just £5,100 a year, plus the £7,696 State Pension, which gives a total of £12,796 a year or £1,066 a month.
Crunching the numbers
These figures will adjust with inflation and stock market changes over the years, but at current rates every £10,000 saved at retirement equals around £510 in annual income.
The UK average income is £26,000 a year and many financial advisors suggest the target retirement income including the State Pension should be two-thirds final salary. That’s an annual pension income of £17,333 if you are looking for two-thirds of the average salary.
Take away the State pension, and that leaves a target fund of £9,637. Divide that by £510 and multiply by £10,000 and that leaves a savings goal of £188,000 for a pension pot.
Don’t forget about tax – this will eat into your monthly income if pension payments total more than the personal allowance, which is £10,600 in the current tax year and add some for inflation, emergencies and stock market vagaries.
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