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Saving enough for retirement can be challenging for self-employed workers and parents – often mothers – who have taken a career break.
For lower earners, pensions can be hard to prioritise – money locked away for the future won’t pay the bills or put food on the table today. Recent research by NerdWallet found that UK adults worry more about making credit card payments and covering childcare costs than about their pension contributions.
At age 75, many pension providers stop accepting contributions and tax relief ends. However, even if you’re close to state pension age, making provision for later life remains important: More of us are living into our 80s and beyond.
Pensions can be a “very beneficial way” to save, regardless of your stage in life, says Brian Byrnes, head of personal finance at Moneybox. “You can get all of the tax relief for the length of time it’s in your pension. Then it can grow tax-free… I don’t think there is an age where you’ve left it too late.”
How much do I need to save for retirement?
According to 2023 research published by pension provider Standard Life, only 16% of people know how much money they will need in retirement and 79% of 55 to 64-year-olds don’t know how much they have in their pension pot.
The state pension is currently worth around £11,500 per year and despite increasing with inflation, it falls £3,000 short of the annual income needed to maintain minimum living standards set by the Pension and Lifetime Savings Association (PLSA). Supplementing your state pension with personal or workplace pensions can help you enjoy a more comfortable standard of living in retirement.
You’re not alone
Working out how much you need to save can be tricky and many of us aren’t saving enough. It’s common for people to underestimate how long they’re going to live and therefore spend too much and save too little. You can plug your age and gender into this calculator from the Office for National Statistics (ONS) to get an estimate of your life expectancy.
Applying generic information about pensions to your own circumstances and financial goals is not straightforward – something the Financial Conduct Authority aims to address through industry reforms. Confusing financial jargon doesn’t help.
“The whole area of pensions can feel quite overwhelming, and the wording and phrasing that we use around it is not the most accessible,” says Byrnes.
Living costs can vary dramatically between a homeowner who is mortgage-free and private or social renters, and there is no one-size-fits-all amount. However, the workplace pensions trade association, the Pensions and Lifetime Savings Association, does publish an estimate of the amount a retiree today will need each year to achieve certain retirement living standards:
- Minimum lifestyle: £14,400 for an individual or £22,400 for a couple – essential needs with limited cash for luxuries.
- Moderate lifestyle: £31,300 for an individual or £43,100 for a couple – more financial security and more discretionary spending.
- Comfortable lifestyle: £43,100 for an individual or £59,000 for a couple – do more of the things you want to do in retirement, including travel.
Don’t let scary numbers stop you from starting
Pension calculators can be very useful tools, but “can get a bit overwhelming when it tells you how many hundreds of thousands you might need in order to fund a comfortable retirement,” recognises Byrnes.
To lessen the overwhelm, Byrnes reminds workers that they are not the only person paying into their pension pot – there are two other contributors. “If you’re in traditional salaried employment, your workplace will be paying in as well. And then, via tax relief, the government is effectively paying in. So it’s a kind of three-person strategy.” For the self-employed, it’s still “very beneficial” for you to pay money from your company into your pension, he adds, either monthly or in lump sums.
5 steps to starting a pension – whatever your age
Not sure where to start? Here’s what our experts recommend.
1. Check your forecast for state pension
Typically, you need 35 qualifying years of national insurance contributions to qualify for the full new state pension. It is important to remember that you can get National Insurance (NI) credits when you receive certain benefits. Eligibility information is available on the gov.uk website.
‘Missing’ NI contributions can affect women who took time out of work due to caring responsibilities, as well as self-employed workers with small profits.
You may be able to fill gaps in your NI record to boost your state pension entitlement. For some people, paying voluntary contributions can be “quite a cost-effective way to build up some pension,” says Dina McDonald, a certified financial coach and pensions expert.
2. Consider the lifestyle you want
Estimate the annual expenses you’ll have in retirement and look at the gap between those outgoings and your projected state pension.
For example, if you’re married and aspire to the PLSA’s ‘moderate’ lifestyle, combine your state pension forecast with your partner’s and subtract that from £43,100.
Saving for later life is “a worthwhile pursuit at any age”, but the amount required “depends on your lifestyle choices and what you envisage your later life to be,” McDonald explains.
3. Look for lost pensions
You may have forgotten pensions from previous employment. Don’t disregard small pots from jobs you didn’t stay at for long: Those savings combined can add up to an amount worth having and pension pots abandoned decades ago could have grown substantially.
Aside from reducing paperwork and passwords, consolidating several small pensions into one pot could save on providers’ fees. However, McDonald says it’s important to seek advice. “It could be that some of these old pensions have very valuable guarantees, so don’t just assume that consolidating them is a good idea,” she says.
If old pensions are proving hard to find, the government’s pension tracing service is an online tool that can help you find contact details you can use to track down pension pots you’ve lost.
4. Make a savings plan
Setting financial goals can make saving easier, helping you make informed spending decisions with your retirement aspirations in mind.
If your household budget is tight, saving small amounts is still worthwhile. Switching on roundups to add spare change directly into your pension “will really add up over time,” says Byrnes.
Able to save more? Consider other financial products alongside your pension, such as stocks and shares ISAs, which are riskier but have historically offered better returns than the cash equivalent. “Don’t be afraid of dipping your toe into a bit of investing. The compounding impact over time will help,” says McDonald.
5. Find ways to boost your income now
Many people choose not to retire when they reach state pension age (currently 66, increasing to 67 between 2026 and 2028) and continue working and paying into a pension. Others may transition to self-employment in later life, enjoying greater flexibility while increasing their financial freedom.
Consider how delaying retirement, working part-time or going self-employed could enable you to put more into your pension pot.
People who are in their 50s and without a pension can start now, encourages Byrnes. “Look at average lifespans… you probably still have 30, 40, maybe even 50 years left, and that is plenty of time to benefit from saving into a pension.”
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