How big a pension pot do you need?

Mike Freer, business development manager, BWCI, for business panel … (37008283)

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By Mike Freer, of BWCI

A READER has emailed to say that they have recently read that they need a pension pot of £638,000 to maintain a comfortable standard of living in their retirement and have asked whether this is true.

Indeed, a recent report by The Pensions and Lifetime Savings Association did indicate this, based on certain assumptions.

It also highlighted the financial challenges we are likely to face as more of us live into our ninth and tenth decades. The funding of long retirements will become the most pressing financial issue for future generations. Even the prospect of a 100-year life is becoming a more likely reality for a growing number of people.

The number of centenarians in the UK hit a record high in 2021, according to official figures, which revealed the count more than doubling since 1991 to 13,925 – the second-highest number in Europe after France. This might surprise those who have seen media reports of average life expectancy in the UK falling back a little.

The pandemic had what is hopefully a one-off impact on recent life expectancy data, but the current average expectancy of 79-82 years hides some very significant differences across the population.

For many better-off people who have worked in white-collar jobs, maintained healthy lifestyles and managed largely to avoid chronic illness, their probable age at death will be much higher. Within the current UK population, around 3.2 million people are aged over 80.

That means that even someone waiting until the state pension age of 67 to retire could quite easily need 25 years of pension income. This is crucial, as no one wants to spend their later years in strained financial circumstances or in ill health. And while the latter is partially out of our control, it is not entirely unrelated to financial security and the comfort – physical and mental – that savings can provide.

While some outgoings might moderate in the later phase of retirement, others, such as care, medical and heating costs, could place a greater demand on incomes, so I would encourage young and middle-aged workers of today to think carefully about the prospect of living well into their 90s and make appropriate pension savings throughout the whole of their working life.

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