Royal London has recently published a report showing that to maintain a good standard of living in retirement you need a pension pot of £260,000.
Together with the state pension, this would give you a pension of £28,000 per year, the UK’s current average wage. This is based on a scenario with no mortgage. If you are renting a property in retirement the figure rises to £446,000.
Saving for retirement is a moving target.
The living standard assessment from Royal London was based on buying annuities rather than taking advantage of pension freedom, and withdrawing lump sums from your pension pot.
Annuities allow you to exchange your pension pot for a guaranteed income. They have performed poorly over the years but recent performance has shown improvement.
Personal finance specialist at Royal London, Helen Morrissey 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 home owners in retirement. For those unable to get on the property ladder during their working life, a large private rental bill needs to be factored in to retirement planning.”
Indeed. Royal London went on to show that inflation and other financial forces will be a considerable factor in determining your retirement standard of living if your retirement is decades away rather than just around the corner.
In 2048, if the average salary and state pension rises at current levels the average salary will be £38,000, and the state pension 18,000, leaving a gap to fill of £20,000 in retirement. This would require a pension pot of 540,500 to deliver what the pension pot delivers at £260,000 today.
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Source: The Daily Mail