Although many people have greater access to information than ever before, the reality is that there’s still a considerable amount of confusion around retirement funding and financial planning generally, not helped by the pension and investment industry’s fondness for jargon. While everyone’s situation will be different and personal to them, it can sometimes be helpful to consider the minimum levels of income that may be required and build from there.

The Pensions and Lifetime Savings Association recently reviewed and updated its figures for the amounts that individuals and couples need to live on in retirement. These are provided at three different levels: ‘minimum’, ‘moderate’ and ‘comfortable’, each with different assumptions for the type of spending included. It’s assumed at all levels that accommodation costs are already covered, i.e. that individuals own their own home, or don't pay rent in retirement.

Moderate

At the 'moderate' level of spending, again assuming the full State Pension is available, an individual would need £11,461 a year in addition to this, and a couple would need £11,922. If one was in need of an incentive to form a long-term relationship, perhaps the apparent economies of scale for couples is an obvious one demonstrated here. We calculate that an individual might need c. £302,000 and a couple c. £314,000 invested in a pension at age 66 in order to achieve this. This assumes that tax is only paid at 20% on income withdrawn in excess of the tax-free lump sum, and therefore, the shortfall may be greater if one pays tax at a higher rate.

Comfortable

At the highest spending level considered by the study, an additional £24,261 (for an individual) or £31,022 (for a couple) per year would be required. For the individual, this equates to a pension of c. £638,000 at age 66 or c. £816,000 for a couple. 

While studies such as that provided by the Pensions and Lifetime Savings Association are useful, in Buzzacott's experience, the figures provided are conservative. Desired spending is different for everyone and it isn’t necessarily just about how much of a lavish lifestyle you lead, but it's also very dependent on where you live. The cost of living for people in London and the South East is on average c. 47% higher than for those in the North East of England**. The study Buzzacott have referred to has examined the whole of the UK when, clearly, costs can vary significantly.

The best way to plan for the future (and particularly retirement) is to have as good an understanding as possible about how much you want (and need) to spend. Once you’ve got that figure (and you know your target retirement date), it’s easier to work backwards and calculate how much you might need to save in order to achieve this. 

You may think it’s all well and good providing a general guide as to the amount one might need in a pension, but how do I get to this and more specifically, how much would I need to save every year. Of course, this depends on how long a period you have to save, and how the underlying investments perform, but let’s take a 40-year-old with no current pension savings as an example. Please note the figures below show the net amount, assuming that the savings are paid into a pension and tax relief from the Government of 20% is added to this.

*Figures rounded to the nearest £100

To demonstrate the benefits of saving earlier, the equivalent annual savings required by a 30-year-old individual to reach the ‘comfortable’ spending level would be £8,300. This would be £101,600 less over the duration of saving than that required when starting at age 40.

Buzzacott have used the example of pension savings here, however for many people, pensions aren’t as tax-efficient as they once were. Many of Buzzacott's clients are affected by the Government’s reduction to annual pension allowances, so they are no longer the default option for all. If you are in a situation where saving into a pension above certain levels each year may result in a tax bill for you rather than a tax saving, there are other options available to allow you to save for retirement and increasingly they see their clients using a range of different income sources in retirement. 

Exactly what savings or investment option is right for you will depend on your tax position, attitude towards risk, as well as wider financial circumstances. The key is not to defer your financial planning to another time but to have a strategy that will ultimately get you to where you want to be. As Warren Buffet, one of the most successful investors of our time said, "someone’s sitting in the shade today because someone planted a tree a long time ago.”