News & Views

Climbing the Pension Mountain

You’re probably aware that retirement can be an expensive business.  Living longer means we need more in our retirement pots to fund our desired lifestyle.  However, how much higher has the ‘pension mountain’ become to climb in recent years? Much higher, it turns out.

New research from mutual insurer Royal London has revealed the extent of the challenge, finding that a pension pot of £260,000 is needed in order to avoid an uncomfortable retirement for the typical worker.

This ‘pension mountain’ has grown in size in real terms by three quarters since 2002, when it stood at a relatively modest £150,000.

For those younger generations who can’t afford to get on the property ladder, the pension mountain they need to climb is even higher.  This is because lower levels of home ownership mean having to continue paying rent in retirement.  Renters in retirement face a pension mountain of £445,000, some 71% higher than the financial challenge faced by homeowners seeking to avoid an uncomfortable retirement.

The research was shared in a new policy paper from Royal London, ‘Will we ever summit the Pensions Mountain?’  It’s an important piece of work, seeking to answer commonly asked questions –  how much is enough and how much do I need to save for my retirement?  The answer is of course very different for all of us, depending on a number of factors.  The amount you need to save for a comfortable retirement will depend on how much income you need, how much you have already saved, and at what age you plan to stop working, among other considerations.

To calculate the figure for their own research, Royal London considered an average earner on a salary of £27,000 a year.  They assumed a full state pension of just over £8,500 a year and no mortgage costs to pay in retirement.  Assuming that workers who can retire on two thirds of their pre-retirement wage will see no fall in their standard of living when they stop work, they would need a private pension income of just over £9,000 in addition to their state pension income.

Going back in time to 2002/03, when interest rates were much higher than today, and life expectancy was lower, a pension pot of £150,000 was needed to make up enough income to live comfortably in retirement, based on this scenario.

Fast forward to today, and the pension pot required has grown to £260,000. This figure represents the new pension mountain.  However, for people who don’t own their homes as they enter retirement, a further £185,000 would be needed to provide the additional income needed to pay rent in retirement.  This brings the total pension mountain for renters to £445,000.

Commenting on the research, Helen Morrissey, Personal Finance Specialist at Royal London said:

“This research is a reminder that when we save for retirement we are chasing a moving target.  If our retirement pot is going to support us through a longer retirement and in an era of lower interest rates, we are going to need to build a much bigger pot than in the past.  More worrying still, we can no longer assume that we will be mortgage-free homeowners in retirement. For those unable to get on the property ladder during their working life, a large private rental bill needs to be factored into retirement planning. For all of these reasons, we cannot afford to be complacent about current levels of retirement saving.”

If you’re concerned about climbing your own pension mountain, it’s never too late to start planning for retirement.

A great place to start is a calculation of your own number.  Rather than being a scary figure, you might be pleasantly surprised at how achievable it is.

What’s important here is calculating a ‘pension mountain’ figure that is personal to you, so you can get to work on climbing that mountain, living a comfortable retirement and living the best life possible with the money you have and will have.

Please don’t hesitate to get in touch if you would like to know how much is enough.