How much should I be putting away for my pension

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Q: I'm 39 years old and I’d like to retire at 55. I've currently got around £55k in two personal pensions, which i recognize isn't a great deal. i earn £45k a year and was wondering how much you'd recommend i should be putting away now, and what sort of pension pot I’ll need at 55 to be able to generate an income of around £18k a year (in today's terms) which i think will be enough for me to live fairly comfortably (by 55 i should have paid off my mortgage).

A: The amount which need to support your standard of living in retirement depends not only on your pensions but any other assets which you will have available such as savings or the proceeds from downsizing your house or business sale. Strictly to determine how much provision you now need to make we should take all of these into account. We also need to make sensible assumptions regarding the rate of return to be used, inflation, increases in your earnings etc.

The best way to properly work out your requirements and any shortfalls is to carry out a cash flow model. That is beyond the scope of this article. However based on the details given by you it is possible to have a reasonable stab at a funding rate to provide the income which you require.

Based on the current single life RPI linked annuity rate for a 65 year old, you would need a fund of just under £530,000. Assuming a real rate of return of 3% (i.e. after inflation) your current funds can be expected to produce a fund of just over £88,000 (£139700 if you do not strip out the effects of inflation). You therefore have a shortfall of just under £440,000. In order to make up this shortfall you would need to contribute about £1787 per month equivalent to just over 47% of your earnings.

This is highly unlikely to be practical. To improve the accuracy of the figures you should take into account other assets as detailed above. Otherwise your options, if the funding rate is unaffordable, are to reduce your target income or retire at a later date.

Answered by:

Chris Wicks
IFA
N-Trust Limited