Pension warning: almost 30% of people have no idea of their retirement needs

A worrying proportion of adults in the UK do not know how much money they will need in retirement , research suggests.

Even those close to their golden years are failing to work out how much income will be necessary when they stop working.

The concern is this lack of knowledge will result in significant shortfalls when people come to retire.

According to a report from Scottish Widows, 28% of all adults in the UK and 21% of over-50s have no idea about the amount of income they will need in their old age.

Peter Glancy, head of pension policy at Scottish Widows, says: “Expectation versus reality when it comes to retirement income shows how vital it is to help people – especially those on the verge of retirement – build a clearer picture of what their own lives could look like when they stop working, and what they can do now to achieve the best outcomes .

Further findings from the company’s report show that, when pushed, £29,000 was the average annual household income people think they will need for a comfortable retirement. Yet Scottish Widows suggests just 43% of people would be on track to achieve this.

Glancy adds: “There are lots of tools available to help people get to grips with pension basics and work out the right steps to take to boost their retirement income, and the earlier we start thinking about our pensions as part of our everyday finances, the more we can do to close that gap.”

The report also highlights a concerning reality that only a third of people think they are adequately preparing for retirement.

How much pension do I need?

When thinking about how much you need to save for retirement, some of the things to consider are:

Research by the Pension and Lifetime Savings Association suggests an annual income of £43,100 is required for a comfortable retirement.

Interactive investor has updated these figures to show how much money you are likely to need each year during retirement, depending on three different lifestyle levels.

These amounts won’t work for everyone and you will have to consider your individual circumstances and lifestyle, but it provides a good outline of how much you can expect to need.

The change over the past year is even more stark when you consider the size of the private pension pot needed to deliver those incomes. For a minimum standard it has jumped £23,400 over the last year to £59,900, for moderate it has risen £42,800 to £290,800, while for comfortable it has rocketed £68,700 to a total of £598,700.

Alice Guy, head of pensions and savings at interactive investor, said that the high rates of inflation seen over the last 18 months had had a “devastating impact on the spending power of peoples’ pension income”, meaning they needed a higher income just to maintain the same standard of living.

As a rough rule of thumb, some people aim to retire on two-thirds of their salary. The median average salary is estimated to be £33,000, based on ONS data from 2022, and when the two-thirds rule is applied, places the median earner between the PLSA’s moderate and minimum categories.

What about the state pension?

“A common misconception is that the state pension can make up for shortfalls in personal pension saving,” says PensionBee chief executive Romi Savova. However, the annual income offered by the new full state pension is £10,600, which isn’t enough for a comfortable retirement.

The state pension should of course be factored into your final retirement pot, but it’s possible you won’t qualify for the full amount. Most savers need 35 years’ National Insurance contributions to get a full state pension, and many of us will have taken career breaks, for example when taking time out to care for family.

It’s also only accessible from the age of 66 – and this will rise to 67 by 2028.

“Savers who pin their hopes on the state pension tend to have underestimated the overall cost of retirement,” Savova continues. “This is one of the worst mistakes to make as it could force savers into a difficult position, where they may have to return to work or sell assets to fund their later life.”

How to plan for retirement

1. Sit down and crunch the numbers

The best way to figure out how much you will need in retirement is to have a clear idea of how much you will need to cover your basic expenses, but also what you might want to do in retirement.

“Once a saver has a clear target for their retirement income, they can adjust their pension contributions and plan accordingly to achieve this,” says Savova.

2. Boost your pension when you get a pay rise

It’s a good idea to revisit your retirement planning throughout your working life, says Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown. “Boosting pension contributions whenever you get a pay rise for instance can mean that over time you end up contributing a lot more over the years which can really boost your final pot.”

3. Keep track of old pension pots

The Pensions Policy Institute estimates there is over £26bn of lost pension money, and the average value of a lost pension is over £9,000. This “can make a real difference to your planning”, says Morrissey. “It may make sense to consolidate old pensions into one so it makes it easier to keep track though it’s important to check you aren’t missing out on important benefits like guaranteed annuity rates by doing this.”

4. The longer you invest for, the more compound interest you will benefit from

“While it’s never too late to start saving, the earlier a saver starts, the longer their pension has to grow,” says Savova. “By leaving a pension untouched for several decades, a small savings pot is likely to turn into a much bigger pot at retirement thanks to compound interest .”