Smart Money: Is it too late to top up my pension pot? - Gareth Shaw

Question: I have two pensions, one with Prudential, which is worth around £200,000, and one with Hargreaves Lansdown worth about £35,000. I am due to retire in June 2022. Should I move money from my savings, around £10,000, to one of these pensions – preferably my Hargreaves Lansdown scheme (as the app is very easy to use)? I am getting such little return from my cash Isa.Answer: One of the most fascinating pieces of research we carry out every year is focused on how much you need to have saved in order to have a comfortable retirement.

Which? has calculated that a retired couple requires £13,000 a year just to cover the essentials, such as groceries, utilities, housing payments and transport

This year, we surveyed 6,300 retired and semi-retired couples to find out, in granular detail, where they spend their money and what kind of income you’ll need to have a retirement filled with holidays, buying a new car and expensive meals out on a regular basis.

Our research suggests that a couple requires £13,000 a year just to cover the essentials, such as groceries, utilities, health, housing payments, transport, insurance and household goods.

To have a comfortable retirement, including European holidays, recreation and charity donations, you’ll need around £25,000 to £26,000 a year. For a luxurious retirement, which includes long-haul holidays and a new car every few years, you’re looking at £40,000 per year.

These figures are "post-tax”, so in reality you need to generate a higher amount of income before tax is deducted.

So, how much will you need in your pot in order to have a comfortable retirement?

It's important to think about your pension income in building blocks – first with the state pension, then with your private or workplace pension savings, and then with any other additional income you might get, from investments or property.

Firstly, your state pension. As you reach retirement age in 2022, you qualify for the new state pension, which is currently £175.20 a week, although not everybody gets that amount. The average payout is around £160 per week so if you both you and your wife were earning this amount, you’d get around £16,000 a year.

So in order to have a comfortable retirement, you need to generate around £10,000 extra income a year from your private savings. To have a luxurious retirement, you’d need an extra £24,000.

When we carried out this research in the summer of 2020, we found that generating a guaranteed income of £10,000 a year using a joint-life annuity, you’d need around £260,000 in your pension pot. To get a luxurious retirement, you’d need around £700,000 with an annuity.

However, the most popular way of drawing an income from your pension pot is through income drawdown.

This is where you keep your savings invested and either drawdown the natural income that your investments generate, or draw some of the capital as well as your income.

We calculated that if your pot grew at three per cent after fees each year, you’d need around £170,000 for a comfortable retirement and £450,000 for a luxurious retirement.

You are well on your way for a comfortable retirement, and so I would suggest maximising your pension saving opportunities while you can.

A further £10,000 contribution to your pension would actually amount to at least £12,500, when topped up with tax relief from the government.

That said, I’d caution against putting the entirety of your savings into your pension.

It’s sensible to have a rainy day pot that is easily accessible – for a broken boiler or an emergency car repair, for example.

And with this, you won’t want to have it invested as it will put your savings at the risk of loss if you need to draw on it in the short term.

Before you make an additional contribution to your pension, beware of the pension contribution rules. You can save 100 per cent of your annual income into a pension and earn tax relief, capped at £40,000. So if your pension contributions for the year are more than £30,000, or your income is lower than the total contributions you’re planning to make, you may be restricted in how much you can pay in.

If you haven’t used up your annual pensions allowance in the previous three years, you may be able to carry some of that forward (see my column from December 5), but I would suggest taking some professional advice that describes the situation you’re in.

Gareth Shaw is Head of Money at Which?. To have your question featured on this page, email [email protected].