Nearly 90 per cent of people are not saving enough for their retirement fund, a new report from the Institute of Fiscal Studies (IFS) found.
A previous Pensions Commissions report found that roughly 15 per cent of earnings should go towards a pension but the vast majority of people are contributing far less than this.
Most of those participating in a pension save low amounts. Some 61 per cent of the middle-earning private sector employees who are contributing to a pension are saving less than 8 per cent of their earnings.
Almost all of the savings are coming in the form of defined contribution pensions, which leave individuals – rather than their employers – exposed to risks that may be difficult to manage well, the IFS said.
However, it is possible to rectify this. i spoke to experts to say how much you need to save and top tips on how to save more for your retirement.
How much do you need to save?
Data from the Pensions and Lifetime Savings Association (PLSA) shows the cost of sustaining a basic lifestyle for a single pensioner is £12,800 while the cost of a moderate lifestyle, which provides more financial security, is £23,300.
A comfortable lifestyle, that includes theatre trips and holidays, would require £37,300 a year. However, these calculations assume that someone has paid off their mortgage.
Bear in mind the actual amount you need in your pot will depend on your personal circumstances, investment growth, and inflation.
How do I save this amount?
Most pension schemes have a “pension modeller” function on the website – click this and it will tell you what kind of pot you are looking at by the time you reach state pension age. It may also tell you what this translates as in terms of income per year if taken as an annuity.
Steve Webb, partner at pension consultants LCP, said: “Have a think about what you might need in retirement once you stop earning. Some bills will hopefully no longer have to be met but others will continue.”
People will need to factor in the state pension they will be receiving so they don’t have to rely only on workplace and private pensions – although the state pension alone won’t go far. Currently, it stands at £203.85 per week.
If you are heading for a shortfall compared with the kind of retirement you want, then there are several options.
One way to boost your pension contributions without hurting your lifestyle is to scale up contributions when you get a pay bump – this way if you pay increase is 2 per cent more you can increase your contributions by this amount without noticing.
As you get older, and hopefully earn more, keep increasing how much you contribute.
It may not be appealing, but you can also consider working for longer. This gives you more time to build up a pension, including with an employer paying in, and less time when you are drawing down your savings. Even working part-time can help make your retirement finances add up.
Tom Selby, pensions expert at AJ Bell, said: “Make the most of the free money available. Saving for retirement is a significant commitment, with your money potentially being locked away for decades. As a result, there are substantial incentives on offer.”
If you qualify for automatic enrolment into your workplace pension, you will benefit from matched contributions from your employer as well as upfront tax relief. Your investments can also grow tax-free, with a quarter of your fund available tax-free from age 55 (rising to 57 in 2028).
Make sure to look at the fees you are paying on your investments. If you decrease these you may boost how much returns you get. If you can search for “fact sheet” online and the name of the fund you are invested in and it will tell you the fee so you can compare
The earlier you can start saving for retirement, the better. Setting up regular pension contributions can help get you in the habit of saving for your future, with the added bonus you’ll benefit from “pound cost averaging” – which is a fancy term for drip feeding your money – as short-term investment bumps will be smoothed out over time.