How much do I need to save for retirement?

If you’re approaching retirement, one of the biggest questions you’re likely to have is, “Have I saved enough?”

There’s no golden rule for how much money you’ll need in retirement, as much will depend on when you retire, what you plan to do in retirement, and how long you live. However, having a rough idea of how much income the average retiree needs, and how to generate it, is a good place to start.

What do I need for a ‘comfortable’ retirement?

Research by the Pensions and Lifetime Savings Association suggests that to fund a ‘comfortable’ retirement, the average single person would need £43,100 a year and the average couple would need £59,000 a year (after tax)¹.

According to our own research, a 66-year-old retiring with a £1m pension who opts for income drawdown could draw a gross income of just over £62,000 a year until age 87. This assumes annual investment growth of 5% after fees and that the income increases annually with inflation. The same 66-year-old could draw around £50,000 a year until age 95.

If their pension pot was worth £500,000, the corresponding figures would be £31,000 a year and £25,000 a year, respectively.

How much income would an annuity provide?

An individual who buys an annuity at age 66 could expect gross retirement income of around £56,000 a year from a £1m pension fund or just under £28,000 a year from a £500,000 pension fund².

Annuity income is guaranteed for life, so you would receive the same annual income regardless of how long you live for. With income drawdown, the value of your pension pot could go down as well as up, and there’s a risk you’ll run out of money if you live longer than you plan for. Bear in mind that income drawdown enables you to vary your income to suit your lifestyle, whereas annuity income is fixed.

It’s also possible to take a ‘mix-and-match’ approach, for example buying an annuity to generate income for essential expenditure and using income drawdown for discretionary spending.

Think beyond your pension

It’s worth bearing in mind that income in retirement can come from other sources, not just your pension. So, if your pension pot is not as big as it needs to be, you might be able to supplement your income with other savings and investments.

ISAs, for example, can be a valuable source of retirement income. Although ISAs do not benefit from tax relief on contributions, withdrawals are completely free from tax and there is no limit to the amount you can accumulate in ISAs in your lifetime. This means ISAs can provide a substantial tax-efficient income that can allow you to leave your pension fund untouched in your first years of retirement, potentially giving it longer to grow.

Depleting ISAs before pensions could also lower your estate’s inheritance tax (IHT) bill. ISAs form part of your estate when calculating IHT, whereas pensions usually fall outside your estate and so can be passed on to loved ones free of IHT.

Other income sources to consider include cash savings accounts, shares, bonds and property income, as well as the state pension, which is £221.20 per week for those who qualify for the full rate (2024/25 tax year).

Next steps

Determining how much money you need to save for retirement is no easy feat. A financial adviser will help you decide whether your pot is big enough, explain how to make up a shortfall, and advise on the most suitable way of accessing your pension, based on your individual circumstances.

Taking some financial advice will help you feel confident you’re on track for a more secure financial future, so you can concentrate on enjoying life today.