Take the tax breaks and start saving now

For a luxurious retirement Which? estimates that individuals will need a pension pot of up to £622,000, best raised by saving significant sums for many years. Picture: Getty

Question: I’m aged 52, self-employed and have not been in a pension scheme for over ten years. I want to know if it’s worth taking out a private pension? I’ve been put off having one as commission and admin fees can be expensive, and I’m wary of the government constantly changing regulations.

Answer: How much do you need to have tucked away to live comfortably in retirement? It’s something that Which? has been trying to figure out for years.

Every single year, we survey thousands upon thousands of retirees, asking them granular questions about where they are actually spending their money once they’ve kicked off their work shoes for the final time.

We then categorise their spending to see how much you need to cover the essentials (food, bills, transport and housing payments), a comfortable lifestyle (throw in an annual short-haul holiday and other leisure activities) and a luxurious retirement (add in a long-haul trip, expensive meals out and a new car every few years).

A single person would need £13,000 a year to cover the essentials; £20,000 a year for a comfortable lifestyle; and £33,000 for a luxurious retirement. This is all after tax has been deducted.

The state pension alone won’t cut it. The full amount of state pension is currently £168.60 a week, or £8,767 a year. If that’s your only income, it’s unlikely to be enough to have a decent quality of life, especially after you’ve deducted all your household bills.

So, you have to bolster your state pension with private savings. To generate £13,000 a year, we calculate that you’ll need to save between £96,000 (if you leave your money invested in a drawdown plan) and £125,000 (if you buy an annuity which pays you a guaranteed income for life). That includes the state pension.

To get to a comfortable level of income, you’d need £232,000 for drawdown and £300,000 for an annuity. For a luxurious lifestyle, you’d need £481,000 for drawdown and £622,000 for an annuity.

You say you haven’t saved into a pension for ten years. If you had around £100,000 built up in older pensions, for example, you’d need to be saving £550 a month until you hit retirement age of 67 to get to the levels of a comfortable retirement. If you’ve got nothing saved, jack that figure up to £1,150.

These numbers demonstrate the challenge of building adequate savings for later life. Unless you own assets, such as property or a business, which you think you might sell before retirement to release a lump sum of cash, a private pension will be vital to make sure you have enough to live on.

The big benefit of a private pension is tax breaks. You can pay in 100 per cent of your income into a pension, capped at £40,000 a year. As a basic-rate taxpayer, for every £100 you pay into a private pension, the government will add £25 in tax relief, which is claimed by your pension provider and added to your pension funds.

And your investments grow tax-free – you only pay tax if you earn enough income when you finally decide to take money out.

You’ve got a good point though – pensions can be a political plaything and rules are often tinkered with. But it is in the Government’s interest to help you save for retirement to lessen the burden on the state, and so the annual tweaks to pension saving limits shouldn’t be a barrier to you saving into one.

Charges on private pensions are certainly higher than those of workplace pensions offered by employers. This is often because of the levels of contributions going into workplace schemes are significantly higher and they can enjoy the economies of scale. How much you will pay in charges will depend on the investments you choose in your pension, but it is possible to find ultra-cheap, high quality investments.

If you’re not sure where to look, some financial advice may be useful. Resources like pensionwise.gov.uk, the Pensions Advisory Service (pensionsadvisoryservice.org.uk) and the Money Advice Service Retirement Adviser Directory (directory.moneyadviceservice.org.uk) should be your starting points.

Gareth Shaw is Head of Money at Which?.

Take the tax breaks and start saving now – Gareth Shaw