Pensions: how much should I be saving?

According to the Pensions and Lifetime Savings Association (PLSA), only 16 per cent of people know how much to save for retirement to achieve their desired standard of living. The PLSA also estimates that as many as 13.6 million UK workers are at “high risk of failing to achieve an adequate income in later life”. Not only is it important to be saving into a pension, but it is also important to know how much is required. There is not much point in saving if it is not going to provide you with a sufficient income during retirement.

 How much is enough?

The first thing to do is to set a target. There are no official guidelines for determining how much income you will need during retirement, however the Pensions Commission says that this is about two thirds of your final salary before retirement. This is known as the target replacement rate. For the majority of people, your retirement income will be made up of a state pension, and any additional private pensions.

For those eligible for the full new state pension, this will provide them with just under £8,300 per year. If you want any more than this when you retire, it will need to come from a private pension.

 What proportion of my income do I need to save?

There is no universal figure that everyone should save for retirement, as it depends on a number of factors such as when you retire, what your target income is, and how long your money will have to last.

Therefore, estimates can vary massively. A think-tank known as the International Longevity Centre, said that workers should aim to save 18 per cent of their salary each year. This is impossible for many. Aviva suggests that about 12.5 per cent would be adequate if you begin at least 40 years before retirement.

The most important thing is to start saving as early as possible, as the value of your investments experience compound growth.

It may be worth considering paying off debts before you start a pension, however if you do, it will mean you have to catch-up afterwards to have enough money during retirement. This means saving a much larger proportion of your income.

As a general rule of thumb, the age you start saving into a pension, half it, and save that percentage of your pre-tax income each year until you retire.

Even if you start at the age of 18, this means saving 9 per cent until retirement.

Despite the fact that this is such a large proportion that will only get bigger the longer you leave it, it is not as difficult as it may originally seem. As it is from your pre-tax income, this will include matching contributions from your employer, and tax relief from the government. The actual percentage of your own spending money that you have to contribute each year, is less than 9 per cent.

Another reason for starting early is that you get used to saving. If you spend 100 per cent of your income for 10 years first, not only will you have to save a larger proportion of your income (as you are starting at a greater age), but you will have to adjust to saving a large percentage of your earnings, rather than spending it. This would likely mean having to cut costs drastically, which can be very difficult to do.

In addition, by leaving it late to start a pension you are missing out on thousands of pounds in tax relief from the government, and in contributions from your employer.


Whilst the amount that should be saved varies between individuals, and is based on a wide range of factors, it is clear that the key to ensuring a decent standard of living later in life is saving early. Seeking advice from an independent financial adviser and setting up a retirement plan is the best way of increasing your chances of success.

Most people underestimate the benefits of saving into a pension, and therefore end up reliant on the state pension as their main source of income during retirement. Do not be one of these people. Get your finances sorted and ensure you are well-prepared for retirement.